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INNOVATIVE PAYMENT MODELS FOR HIGH-COST INNOVATIVE MEDICINES
Report of the Expert Panel on effective ways of
investing in Health (EXPH)
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Luxembourg: Publications Office of the European Union, 2018
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doi:10.2875/835008
doi:10.2875/049700
EW-07-17-152-EN-C
EW-07-17-152-EN-N
Print ISBN 978-92-79-77052-4
PDF ISBN 978-92-79-77053-1
EXPERT PANEL ON EFFECTIVE WAYS OF INVESTING IN HEALTH
(EXPH)
Opinion on Innovative payment models for high-cost innovative
medicines
The EXPH adopted this opinion by written procedure on 17.1.2018 after public hearing on 25.10.2017
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About the Expert Panel on effective ways of investing in Health (EXPH) Sound and timely scientific advice is an essential requirement for the Commission to pursue modern, responsive and sustainable health systems. To this end, the Commission has set up a multidisciplinary and independent Expert Panel which provides advice on effective ways of investing in health (Commission Decision 2012/C 198/06). The core element of the Expert Panel’s mission is to provide the Commission with sound and independent advice in the form of opinions in response to questions (mandates) submitted by the Commission on matters related to health care modernisation, responsiveness, and sustainability. The advice does not bind the Commission. The areas of competence of the Expert Panel include, and are not limited to, primary care, hospital care, pharmaceuticals, research and development, prevention and promotion, links with the social protection sector, cross-border issues, system financing, information systems and patient registers, health inequalities, etc. Expert Panel members Christian Anastasy, Pedro Barros, Margaret Barry, Aleš Bourek, Werner Brouwer, Jan De Maeseneer (Chair), Dionne Kringos, Lasse Lehtonen, Martin McKee, Liubove Murauskiene, Sabina Nuti, Walter Ricciardi, Luigi Siciliani and Claudia Wild Contact European Commission DG Health & Food Safety Directorate B: Health Systems, medical products and innovation Unit B1 – Performance of national health systems Office: B232 B-1049 Brussels [email protected]
The opinions of the Expert Panel present the views of the independent scientists who are members of the Expert Panel. They do not necessarily reflect the views of the European Commission nor its services. The opinions are published by the European Union in their original language only.
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ACKNOWLEDGMENTS Members of the Working Group are acknowledged for their valuable contribution to this opinion. The members of the Working Group are: Expert Panel members W. Ricciardi Chair P. Pita Barros Rapporteur A. Bourek W. Brouwer L. Lehtonen M. McKee C. Wild The declarations of the Working Group members are available at: https://ec.europa.eu/health/expert_panel/experts/working_groups/document-group/wg-innovative-payment_en
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SUMMARY The growth of pharmaceutical expenditures due to new high-cost innovative medicines, under the current institutional framework, creates financial challenges to health systems. The recognition that the current path of growth cannot be continued indefinitely leads to the search of new ways to ensure that innovation “that matters” is produced, that patients have access to innovation and that health systems are financially sustainable. This context leads to the discussion of innovative payment models for new medicines that improves the way the three above-mentioned objectives are met. It is unlikely that a single payment model will be optimal for all situations. Some broad principles should be observed when defining specific payment models for innovative medicines and deciding on rewarding R&D in pharmaceutical products: • Greater price and cost transparency, including the acknowledgement that high prices (high costs to payers) may or may not have underlying high costs of R&D. • Revisit the promotion of innovation through patent law and market exclusivity, as other mechanisms to promote and reward high-value innovations can and should be devised. This is particularly true when clear areas of neglected attention can be identified in a consensual way. The patent system is the current best option for decentralized innovation efforts when consumers are price sensitive, but not necessarily otherwise. This opens space to explore new models of promoting innovation that will encompass novel payment models which may or may not be associated with different rules in R&D funding (say, making use of prize-awarding mechanisms). • Develop methodologies to measure the social value of pharmaceutical products and systematically use such methods, for instance in the context of Health Technology Assessment. • Have an assessment of exercise of market power in each price negotiation, as insurance protection set by health systems reduces the role of consumer’s price sensitivity in limiting price increases of new products under patent protection. • Set better rewards for higher therapeutic value added, so that innovation efforts are directed to the more relevant areas. • Payment systems should evolve in the direction of paying for acquisition of a service (treatment) and not of a product (pill). • Explore non-linear payment systems, including bundling, price-volume agreements, differentiation across geographies, and across indications, ensuring the conditions required for all parties to benefit. • Create dialogue platforms involving all relevant stakeholders. Keywords: EXPH, Expert Panel on effective ways of investing in Health, scientific opinion, innovative payment models, high-cost medicines Opinion to be cited as: EXPH (EXpert Panel on effective ways of investing in Health), Opinion on Innovative payment models for high-cost innovative medicines
© European Union, 201x
ISSN 2315-1404 ISBN doi:xxxx ND-xxx http://ec.europa.eu/health/expert_panel/index_en.htm
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TABLE OF CONTENTS ACKNOWLEDGMENTS ........................................................................................... 3SUMMARY ........................................................................................................... 4BACKGROUND ..................................................................................................... 6TERMS OF REFERENCE .......................................................................................... 7OPINION ............................................................................................................. 7
1. The challenges to the health system ....................................................... 72. The challenges to innovative payment models ......................................... 9
2.1. Current practice of pricing new pharmaceutical products ........................ 92.1.1. General scenery ................................................................. 92.1.2. Innovative payment models for new products ....................... 182.1.3. Strategic analysis of MEAs .................................................. 25
2.2. Health system performance .............................................................. 263. Properties for payment models of innovative medicines ............................ 28
3.1. Role of directing R&D ....................................................................... 283.2. Role of affordability to health systems and to patients .......................... 293.3. The role of intergenerational transfers ................................................ 313.4. The balance between objectives and instruments ................................. 323.5. Framing health system design options ................................................ 333.6. Governance of new payment models .................................................. 34
4. The instruments ................................................................................. 354.1. Prices ............................................................................................ 36
4.1.1. Non-linear prices ............................................................... 364.1.2. Price transparency ............................................................. 404.1.3. From paying pills to paying services ..................................... 40
4.2. Innovative procurement initiatives ..................................................... 414.3. The incentive role of prices and of the payment model .......................... 424.4. Searching for a new institutional design .............................................. 47
4.4.1. Prices set by explicit negotiation .......................................... 474.4.2. Real world data ................................................................. 494.4.3. Patent laws ...................................................................... 49
4.5. International cooperation .................................................................. 504.5.1. Platform for stakeholders' dialogue ...................................... 504.5.2. Structured cooperation ...................................................... 53
4.6. Procurement and commissioning ....................................................... 544.7. Adaptive pathways .......................................................................... 554.8. Revisit patent system and find new ways to fund R&D by results ............ 56
5. Basic principles for new payment models ............................................... 575.1. Greater price and cost transparency ................................................... 585.2. Changing the rules of protecting innovation ........................................ 595.3. Changing the rules in R&D funding ..................................................... 605.4. Changes in Governance .................................................................... 615.5. Develop methodologies to measure the value of pharmaceutical products625.6. Have an assessment of exercise of market power in price negotiations ... 625.7. Set better rewards for higher therapeutic added value .......................... 635.8. Move towards acquisition of service rather than product ....................... 635.9. Explore non-linear payment systems, including bundling, differentiation across geographies and across indications .................................................... 645.10. Create dialogue platforms ....................................................... 64
6. Final remarks ..................................................................................... 64MINORITY OPINION ............................................................................................. 69LIST OF ABBREVIATIONS ..................................................................................... 70REFERENCES ...................................................................................................... 71APPENDIX .......................................................................................................... 77
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BACKGROUND The emergence of high-price innovative medicines, implying high costs for health care
payers, is exerting strong financial pressure on health systems. Over the years, health
care payers and pharmaceutical companies have explored different ways of defining
payment for new products that ensures three main objectives: quick access of patients to
more effective new medicines, that provides adequate incentives to R&D efforts (both in
rewarding R&D and guiding efforts to areas of higher social value) and that keeps health
systems financially sustainable. In some ways, the issue of fairness (in the division of
social surplus generated by the new products) can be seen as a separate one, additional
to these three main objectives in the context of new pharmaceutical products.
Recent years have seen a growing number of new medicines with price increases that led
health authorities and health care payers to question the implications for the financial
sustainability of health systems. Detailed information on prices of new pharmaceuticals in
different countries is often not available as they result from confidential price
negotiations. Howard et al. (2015) document price increases in the anticancer medicines
market of about 10% a year in the past 20 years, after controlling for increased benefits
(survival). Cost changes are deemed unlikely to be behind the price increases. The main
explanation offered by Howard et al. (2015) for the high prices is based on the roles of
health insurance in making patients insensitive to medicinal products prices (allowing
companies to increase prices without losing demand) and of anchor effects of previous
prices (by which a price increase over a previous high price is tacitly deemed as natural,
even if the reference point comes from other, non-competing, pharmaceutical products).
The response to this trend has been the search for new payment models between health
care payers and pharmaceutical companies. The new payment models have been
generally termed Managed Entry Agreements and have a wide variety of formulations. A
crucial question is whether, or not, any of these, or a subset of them, will deliver a
solution to the three objectives outlined.
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TERMS OF REFERENCE
The Expert Panel on effective ways of investing in Health is requested to analyse the
following:
(a) What is the current role of the national pricing and reimbursement authorities to
improve access on innovative medicines? Is there a scope to explore new ways of
setting prices for specialty medicines in terms of improving access, while taking in
to account the costs, the benefits, the budget impact and the future return on
investment on a transparent way? How to deal with polypharmacy/ combination of
treatments? What are the existing frameworks for such dynamic payment models?
Any experience from other economy sectors (transport or telecommunications) that
can potentially be applied to medicines?
(b) How can the use and uptake of medicines impact the health care costs? Can this be
reflected on price setting i.e. reward for the right behaviour? Ways to monitor the
adherence to treatment? What is the importance of choosing the right outcomes to
measure the performance? What is the role of RWD for innovative payment models
and are there any prerequisites to develop such system? Is it possible to develop a
common definition for RWD from all different perspectives (regulators, HTA bodies,
payers, pharmacovigilance etc.)?
(c) Is there a theoretical framework for the interpretation of the results and outcomes?
Is there a framework of health system performance assessment in the area of
pharmaceuticals and possible areas for future work? Is there a scope to improve
resilience and cooperation between those bodies that are involved in the decision-
making process? What type of synergies can be developed between the payers,
HTA bodies and regulators in the EU?
OPINION
1. The challenges to the health system Health systems in Europe face common challenges: non-communicable diseases
dominate the disease burden (depression and heart disease are leading causes to healthy
life years lost), infectious diseases such as HIV and tuberculosis remain a challenge to
control, antibiotic resistant organisms are emerging, people live longer and have less
children, people migrate within and between countries and cities grow bigger, primary
health care systems lack preventive services, public health facilities are outdated, rising
health care costs require ever more funding, etc.
In a more systematic way, health systems come under pressure from different sources:
technological innovation and arrival of new products asking high prices, professional
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differentiation, population needs and demand, and demographic and epidemiological
transition.
In the European Union, Member States are experiencing challenges in delivering
financially sustainable health care. Those challenges translate into concerns about access
to health care (EXPH, 2016b). One of the areas of concern is access to medicines, which
faces conflicting objectives for the role of prices as they provide incentives for
development of new products and influence affordability (and access of patients to
treatment), an issue discussed in detail below.
It is by now well documented that expenditure on new molecules has outpaced the
growth of GDP and the growth of other health care expenditures, considering both
ambulatory care and hospital care. Several factors contribute to the current concern
regarding access by patients to new pharmaceuticals. Lower economic growth (meaning
less available resources), health systems built to answer acute health problems and not
for prevention and management of chronic conditions (meaning that more costly care
and less adequate care is provided),1 and the increasing prices asked for the new
products are among the main drivers of the concern with the growth in health
expenditures.
The expenditure growth in new pharmaceuticals is a composite of growth in new
molecules being available and the price increases compared to previous therapeutic
alternatives. To address the growth in pharmaceutical spending associated with new
pharmaceutical products we need to inquire about the relative strength of both “quantity”
and “price” dynamics and their drivers.
The impact of high-cost innovative medicines on health expenditures growth also
includes ratchet effects of different types. On the one hand, higher pharmaceutical
expenditure may have a cost-offsetting effect in other areas. This may happen if they
substitute for other interventions (say, avoiding surgery). On the other hand, under a
tight budget situation, the increased expenditure on pharmaceuticals may push away
expenditures on other areas of health care (or public expenditure, in the case of
Government-based national health services). Alternatively, contributions of people have
to increase, displacing consumption of other goods. Both cost-offset effects and care
diversion effects need to be considered.
1 Although prevention of course does not necessarily lead to lower costs, as documented in Van Baal et al. (2008).
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Additionally, the decision process can be biased, whenever there are concentrated
benefits (small number of patients that benefit from the high-price demanded, resulting
in too many costs for too little innovation). The balance of power in price determination
results from institutional rules and from agents’ decisions (companies, governments,
specialized bodies, etc.) acting under these rules.
2. The challenges to innovative payment models
2.1. Current practice of pricing new pharmaceutical products
2.1.1. General scenery
There is little systematic knowledge on pharmaceutical markets, optimal R&D levels and
pricing and marketing strategies by companies. Pharmaceutical companies have been
found to be high performers for their investors. Merger activity between pharmaceutical
companies was significant in the past three decades, reducing the number and increasing
the size of companies engaging in across-the-board development of new products.
Companies’ expenditure breakdown by category often reveals that R&D costs represent a
much smaller share than promotion and marketing costs (Mossialos, 2017).
Several arrangements to set prices and access conditions for new medicines have been
experimented by the national authorities in charge of pricing and reimbursement
decisions. A common, general, denomination for these arrangements is outcomes-based
managed entry agreements (also known as market entry agreements or market access
agreements).
The several forms and variants of these agreements deal with different aspects, such as
hidden price discounts (of value to companies as such discounts bypass international
referencing practices used in many health systems), uncertainty about the performance
of the product in real-world context, asymmetric information about product (potential)
performance between companies and health care payers, etc. (See Morgan, Vogler and
Wagner, 2017, for a more detailed description of the role of these agreements).
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Most countries conduct benefit or cost-benefit assessments, with different degrees of
transparency and detail, before they negotiate with companies on prices taking the price-
reference system into consideration.
Box 1: Example: “highly innovative product” status in the Czech Republic
Some countries have more-or-less defined criteria for assigning of the status of the
"Highly Innovative Product - HIP". In the Czech Republic, the criteria involve: incidence
of serious adverse events decreases at least 40%, reduces serious medicine interaction
by at least 40%, implies substantial reduction in mortality and prolongation of median
survival of more than 2 years, or, in the case of patients where predicted survival is less
than 24 months, to extend the life expectancy of at least 50%, at least about 6 months
etc. Based on this, only "specialized care facilities" are assigned, where the "HIP" may be
used, and these facilities then negotiate the pricing with Health insurance
companies/Sickness funds.
Temporary as well as definitive pricing (for every strength of a medicinal product, etc.) is
then performed (in Czech Republic as the lowest price determined from a "reference
basket"). Payment for packing a highly innovative product is fixed at the lowest foreign
or Czech producer price of that product in adequate strength and pack sizes with some
possible variations. This price then stays in place until the HIP is replaced by a fully
comparable cheaper or a more effective one.
The differentiation of price setting for intramural (hospital) and extramural settings is an
issue of concern. Some countries decide then which medicines to take “in quarantine”
(within the context of risk sharing, managed entry agreements etc.) due to uncertainties
of benefit or unfavourable (incremental) cost-benefit or cost-effectiveness ratio, delaying
immediate access to the new pharmaceutical products by patients in exchange for a
more informed decision and more appropriate price and associated spending.
With respect to policy interventions in this area, the recent survey by Vogler et al. (2016)
covered over 550 pharmaceutical measures surveyed in 32 European countries (for the
period 2010–2015). The most frequent measures adopted by health care payers were
price reductions and changes in co-payments. Unsurprisingly, countries strongly hit by
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the crisis tended to make more policy changes than the others, aiming to curb
pharmaceutical expenditures growth.
Unfortunately, neither the arrangements (price-based vs. clinical-outcome based) nor the
outcomes (improvement in certainties of clinical benefit, improvement in cost-benefit
ratio) in many of the new payment models being used are made public. This undermines
the international price-reference system in Europe, used by most countries in some form.
The number of MEAs carried out by each country varies considerably as does the type of
MEA. The scope and breadth of MEAs is country-dependent, and it is not simple to find
broad regularities.
Figure 1: Number of MEA per country and type
Source: Figure 9.3 in Ferrario and Kanavos (2013),
Different prices across countries and different prices across indications for the same
product (which may carry different commercial names according to indication) are
additional tools available on a European (or transnational) perspective. The discussion of
differential pricing across indications and/or countries relies on the (implicit) view that
rewards to innovation should take place through higher prices. From economic analysis,
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the basis for such price differentiation results from different demand price elasticities
(how use of the product is related to its price) and the objective of funding a certain
amount of R&D (common to all users and countries). The R&D cost of developing a new
pharmaceutical product is largely independent of how many countries decide to use it
and for how many indications the product is adopted. Revenues from all sources
(indications and countries) contribute to reward the R&D effort. If an average price
across indications (or across countries) is set, then letting firms adjust individual
indication prices to meet the average price would also lead to the pricing structure that is
best from the social point of view, given the decision to pay for innovation through
prices. The technical argument for differential pricing to be social-welfare improving is
conditional on having a certain level of R&D cost to be covered. Without some reference
level for the average price across indications and/or countries, allowing differential
pricing does not have necessarily the same social welfare implications.
There is also a crucial role for the possibilities of arbitrage, exploiting price differences.
Arbitrage means buying at the lower price to use it on the “market” of higher price
(where “market” can be a different indication or a different geography/country).
The practice of different prices across geographies or indications often creates discomfort
with policy makers, opinion makers and, ultimately, the population. The exact conditions
of its existence, the scope for its application and the social welfare implications need to
be carefully defined, assessed and explained to the several stakeholders, often in an
international context.
Only some countries will have the ability to manage managed entry agreements, and
oversee the results. Replication in every country will be challenging for small countries
due to costs of setting and using monitoring mechanisms. There are clear economies of
scale in the management of entry agreements for new pharmaceutical products, even
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though it may require some uniformity or harmonization of objectives, thresholds,
methodology, etc.
An important aspect is to clearly identify what are the problems that need to be solved,
as the broad question of how to set payment models for high-price innovative medicines
allows for different interpretations.
There are two main issues: how to deal with uncertainty about the value of the new
product and how to set its price.
The great majority of discussions have the focus on the first problem. The concerns of
that line of discussion are one or several of the following: do not pay for little value
added, avoid setting high price for low value-added products when at moment of setting
the price true value at population level is not known, ensure patient access (at least for
some patients), avoid payers’ budget disruption and reward more the innovations that
bring more value. Implicitly, the discussion takes as granted that health technology
assessment together with a threshold approach for incremental cost-effectiveness ratio
(or a variant of it) is the adequate institutional setting for price determination, allowing
firms to set prices with considerable freedom as long as these prices allow the threshold
to be met. Note that economic evaluations may examine against which costs (as opposed
to prices) new technologies can still be seen as welfare improving. Even if this criterion is
met using price as estimate of costs, two important questions remain unanswered: (i)
are prices a good proxy for costs (or do they include a large margin)? And, if (i) cannot
be confirmed, (ii) Do we consider this price to lead to a fair division of (expected) gain
between manufacturer and society?
The second problem starts where the first problem stops and is related to these
questions. Current institutional mechanisms do not make any assessment of market
power exercise (ability of firms to set high prices without hurting the level of demand
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they face, that is, without losing sales), which is more likely in the case of new
pharmaceutical products than in other sectors of activity, due to insurance protection and
R&D protection through patents. Insurance protection decouples who benefits from the
use of the product and who pays for it. Patent protection implies that there are no close
competing products, even though some competition may exist from other alternatives
based on different active ingredients for the same disease and on therapeutic
substitution.
The question is whether, or not, such high prices are really the result of well-functioning
system of rewards to innovation. And, equally important, the question of which price
health systems can ‘afford’ to pay, where affordability is defined considering opportunity
costs of funds used to pay for the new products.
The use of managed-entry agreements provides a way to have early introduction of new
products “managing” the information flow. The basic issue addressed is typically related
to evidence required to take final decisions, later on when more information has become
available.
This means that managed entry agreements are not designed to address the issues of
high prices as a result of exercise of market power by pharmaceutical companies.
To focus on the role of information gathering of MEAs, consider the following example,
which assumes that value of the medicine is high enough to ensure a net benefit. Of
course, HTA may reveal that there is no additional value to the product, in which case the
decision would be simply to not include the product in the health care payer’s coverage.
Figure 2 illustrates the difference between the two issues of information gathering and
exercise of market power. Take four elements of the value chain: R&D costs incurred to
discover the new product (the blue bottom box in each column), production, marketing
and all other costs that take place to bring the R&D outcome to patients (the green
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second-to-bottom box), the margin retained by the company (purple second-to-top box)
and the net value accrued to the health system (defined as the total value minus the
price paid, and represented by the orange top box in each column).
Column (1) in Figure 2 shows a typical distribution of values in a new product in the
economy (not necessarily in the health sector) that is worthwhile producing. The price
paid by consumers is given by the sum of bottom three components. The top box
corresponds to value accrued to the payer/consumer (the difference between the
valuation it gives to the product and the price paid). The net value generated is
represented by the difference between valuation by payers/consumers (total height of
column in situation (1)) and costs (sum of the bottom two boxes). The price splits the
net value between payer/consumer (first box from the top) and producer (second box
from the top). Sizes of bottom two boxes have no meaning in this illustrative example
and are kept constant for simplicity. It is important to highlight that this figure
demonstrates the difference in importance between costs (resources sacrificed in order to
develop and produce a good) and price (what is paid to the producer by the buyer).
Situation (2) introduces uncertainty about the value of the product, at the time of
deciding its introduction in the health system and its respective price. On the left side of
situation (2) there is a low-value product and on the right side a high-value product.
Costs are similar whether a low or a high value product is present, to simplify the
argument. Normal working of the market would set a low price on the first case, as
consumers require such a low price to be willing to buy the product. It would set high
price on the second case, as the highest willingness-to-pay by consumers allows firms to
set that higher price without losing sales.
The problem faced by a health care payer is defining the price without knowledge, at that
moment, of whether it is on the left or the right column in situation (2). Setting an
average price leads to paying more than the value if the low-value product is in the end
Innovative payment models for high-cost innovative medicines
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revealed to be the true one, while under-rewarding, in relative terms, the innovator if
there is a high-value product (which may undermine the dynamic incentives to invest in
R&D).
Situation (3) has the same uncertainty on total valuation of the product. Now, some
procedure sets the price closer to the final valuation by health care payer. This leads to a
rise in price, compared to situation (2), which can be substantial if the difference
between a high-value (right column) and low-value (left column) product is large. Thus,
incentives for the company to invest in R&D to have a product corresponding to right-
hand-side column occurs are stronger than previously. Situation (4) has almost similar
value in both cases, and the same approach to define prices that favours high prices,
with little gain in guiding efforts of R&D towards one or the other (and does not matter
much in terms of value in the end).
Situation (5) reduces the price paid in comparison to situation (4) by some mechanism.
By making the price to the company almost equal in both R&D outcomes (high-value or
low-value innovation) does not provide a strong signal for the company to obtain the
right-side case instead of the left side. On the other hand, it contains price and has a
lower expenditure, at the risk of having a lower-valued innovation.
Thus, the payment model has to balance these different blocks. And knowledge of all of
them is crucial to have a full view of the problem. The managed entry agreements focus
mostly on ways to deal with the uncertainty (for each situation 2-5, the difference
between left-side and right-side columns), neglecting the split of value between payer
and company may lead to very unbalanced division (the two top boxes). Some of the
MEAs will address the issue of price but based on differences of value to society and not
in terms of explicit margins discussion (as these are usually concealed by the absence of
information on the cost structure – the two bottom boxes).
Innovative payment models for high-cost innovative medicines
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The current institutional framework has led, over time, to situation (4) and the policy
challenge we face is to move towards situation (5).
Figure 2: Illustrative example of value split under uncertainty about final value of product
Note: Size of green and blue boxes kept constant for simplicity. Only relative size of
Violet and orange boxes are discussed.
Source: EXPH, Original figure
The discussion has focused on the uncertainty about the value of the product and on the
surplus division, assuming that the valuation was high enough to warrant introduction of
the new product. Decisions about including the product in the coverage provided by the
health care payer are also part of the process of bringing, or not, new products to the
patients. In this case, health technology assessment will inform whether, or not, the
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innovation will be included in the coverage level. It may be the case that the value of the
new product, even in the best possible case, leads to a cost-effectiveness analysis that
puts it above a threshold reference used by the health care payer. In terms of Figure 2,
those products that exceed an appropriate maximum willingness to pay based only on
the green and blue box, so that their introduction cannot be realized in a welfare
improving way since their prices, even based solely on costs, are too high, will be
detected by HTA in combination with clear thresholds for incremental cost-effectiveness
ratios (if consistently applied). In this case, there is no role played by MEAs in bringing
the product to the market. But it may happen that uncertainty about the value of the
product is such that under low valuation the product is not introduced (i.e., there is no
feasible price that meets the HTA requirements) and under high valuation there is social
advantage in introducing the product. The conditional payment associated with MEAs
may help with introduction of the product in this case. This situation also highlights a
major governance risk – that a product introduced initially based on expected valuation,
later, based on its performance in a population context, is found to be a low value
product, but it is not excluded from coverage due to (potential or actual) public opinion
or patients’ pressure. Due to a governance failure, the MEA will not work as intended in
this particular type of situation. Such failure is not merely theoretical. Allocation decisions
in health care, especially negative decisions, can be controversial, both politically and
societally, which is an important factor in the current discussion. These aspects of MEAs
add to the discussion in Figure 2, which highlighted, for simplicity of presentation, only
the points of managing additional information and market power (surplus division) in the
context of a product always worthwhile to include in coverage.
2.1.2. Innovative payment models for new products
Value-based pricing
“Value-based pricing” stands for the assessment of the therapeutic value of medicines
and the according pricing deduced from the clinical value. “Value-based pricing” can lead
to the reduction of prices for medicines with no or limited added value and increase the
price for medicines with high value, which in turn may encourage manufacturers to focus
their R&D on therapeutic medicines with superior value (World Health Organization
Innovative payment models for high-cost innovative medicines
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(WHO) 2016b). A concern emerges from this: the relative incentive to R&D, resulting
from paying a price that approaches the value of benefits, transfers most of value
generated to companies, affecting negatively the financial sustainability of health
systems. There is difference between value-based pricing as a way to pay more for more
benefits from innovation and prices approaching total value. Value-based pricing in the
sense of the first part is a way to provide incentives for better innovation, while value-
based pricing in the sense of the latter element is a tool for exercise of market power.
This issue is discussed at length below.
“Value-based pricing” has become a widespread term to designate prices set according to
principles of value-based health care. The essential driving force behind value-based
health care is the need to have value measurement of outcomes that matter for patients.
The main operational implication is that health care without value for patients should not
be paid for. This does not automatically translate into a pricing rule for new products.
Value-based health care requires a careful definition of outcomes of interest to patients,
which can be particularly problematic in the case of chronic conditions or health
interventions that have a very long-term effect, an aspect that is beyond the scope of
this Opinion.
The notion of “value-based pricing” for new pharmaceutical products rests on the
attractive and intuitively simple principle of paying more for products that deliver more
value. Thus, some sort of price discrimination according to value generated seems to
underlie some of the discussion of pricing in value-based health care. The value-based
health care framework is consistent with the different ways of setting prices and with the
different roles of prices in the context of pharmaceutical innovation. In particular, it does
not follow from the principles of value-based health care that maximum prices for a new
pharmaceutical product should be set equal to the value added it brings over existing
therapeutic alternatives or pre-existing practice in treatment.
The principle itself of setting prices according to some automatic rule that allows the
price of a new product to appropriate all, or most, of the net value it brings does not
follow automatically from the value-based health care approach.
This argument is of different nature from other motives to have reservations about
value-based pricing for new pharmaceutical products, such as the uncertainty regarding
the definition and the measurement of value.
Innovative payment models for high-cost innovative medicines
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The main attractiveness of paying new products according to value in some way results
from the R&D incentives it provides, not from the access effects it entails. It gears
innovation in the direction of more relevant products and needs of patients.
Managed-entry agreements
“Value-based pricing” is an umbrella term for a variety of purchasing strategies outside
the traditional models of volume-based purchasing (The Network for excellence in Health
Innvovation (NEHI) 2017). For the time being there is little knowledge whether, or not,
value-based pricing yields its promised benefits (World Health Organization (WHO)
2016).
Managed Entry Agreements (MEAs) are increasingly used in many European countries.2
Under MEA, various forms of confidential agreements between pharmaceutical
manufacturers and payers (hospitals, social insurances) are subsumed, which are mainly
negotiated when there is uncertainty on the actual clinical benefit of the medicines, but
high public expenditures are required. Although they have been applied in many
countries for several years, there is no public knowledge available whether they meet the
associated expectations (a contribution to the reduction of uncertainty on actual benefit,
amount of cost reductions and/or access of patients to these medicines) (Grössmann,
Wild et al. 2016b).
Given the solidarity of public funding of health care, the increased demand for evidence
about the experiences made with and the expectations met by MEA seems quite
legitimate (Morgan, Vogler et al. 2017; Wild, Zechmeister-Koss et al. 2017). Recent
accounts of MEAs are due to KCE (2017), the Belgian HTA institute, and Ferrario et al.
(2017), with the latter focusing on Central and Eastern Europe countries.
In principle, the Managed Entry Agreements differ in whether they refer to the prices
(rebates and discounts, “free” of delivery medication, price-volume agreements, budget
limits) or they are based on the clinical outcome (conditional reimbursement under
documentation in registers, performance-based payment/payment by result): here
England and Italy are the countries with the most experience with MEAs.
The properties associated with each type of agreement depend on the particular context
and on the specific rules adopted in the agreement. MEAs not without problems and,
depending on the exact comparator situation, they may even introduce inefficiencies.
2 Recent reviews of managed-entry agreements is provided by KCE (2017) and Ferrario et al. (2017).
Innovative payment models for high-cost innovative medicines
21
One example is the moral hazard effect of the so-called risk-sharing agreements.
Whenever a payment occurs only if successful treatment is achieved, decision makers in
the health system may have an incentive to put too many patients into treatment as
treatment failure will not have a direct financial cost to them. As the financial cost of
failures passes through to prices of successful treatments by companies, health systems
may end up with too many patients under treatment under a higher price, driving up
health care expenditures (Barros, 2011).
To companies, MEAs offer the additional benefit of setting confidential effective prices,
breaking the link of external reference pricing (a policy that relies on publicly available
listed prices of pharmaceutical prices in reference countries). The confidentiality of prices
brings countries to a situation that is usually termed prisoner’s dilemma. Individually it is
optimal to sign agreements of prices that are confidential, while globally countries could
be better off by keeping a coordinated action on price determination for pharmaceuticals.
There are arguments both in favour and against MEAs. On the advantages side one may
have the following:3 (a) reduce uncertainty about the real value of medicines, if
meaningful additional data (real-life data) are collected under those agreements
(however, these data are not necessarily published); (b) prevent the complete exclusion
from the reimbursement of expensive medicines with (still) uncertain clinical benefit and
thus grant access to medicines, so that the patient's hopes do not have to be
disappointed; and, (c) keep the budget under control because they contain discount
rules.
These agreements may also bring disadvantages, with the following ones being listed in
the existing literature:4 MEAs (a) provide access to medicines with uncertain clinical
benefit and - at a later stage - it is difficult to argue against patients why they are not
reimbursed anymore (dynamic consistency problem) (see van de Wetering et al. (2017)
for a discussion); (b) are associated with additional costs for implementation, especially
when they are based on the clinical outcome data; (c) require clear decision rules on
when to stop reimbursement or adjust use or pricing; (d) require well-functioning IT
support, and (e) undermine the current system of international price comparison
("External Price Referencing / EPR"), since MEAs usually contain confidential agreements
on discounts, while EPR is only referenced to list prices, since the discounted confidential
prices are not known. As a result of the confidential agreements, the payers can claim to
3 See Ferrario and Kanavos (2013); Ferrario and Kanavos (2015); Grössmann, Wild et al. 2016; Morgan, Vogler et al. 2017; The Network for excellence in Health Innovation (NEHI) 2017; Wild, Zechmeister-Koss et al. (2017); 4 See footnote 1.
Innovative payment models for high-cost innovative medicines
22
have completed a good deal, although there is no objective evidence on the basis of
comparisons due to lack of comparative data from the other countries.
MEAs should only be used when HTA identifies issues or concerns about key outcomes
and/or costs and/or organizational/budget impacts that are material to a reimbursement
decision. They provide patient access and can be useful to manage technology diffusion
and optimize use. However, they are administratively complex and may be difficult to
negotiate and their effectiveness has yet to be evaluated. Moreover, they mainly are
designed to address the issue of uncertainty about the value of the effectiveness of the
medicine and not the (high) price tag or the rising pharmaceutical expenditure, although
well-designed MEAs can help on price issues (especially if explicitly addressed).
Areas of innovation
Additional to the higher growth of medicines expenditure relative to income growth and
overall health expenditure growth, other concerns are present. The (lack of) development
of medicines for small groups, which may raise fairness issues, is one concern. Another
one is that current incentives reward companies to develop mainly new medicines of little
advantage rather than developing superior medicines as long as having a new product
brings with it the (implicit) promise of a high price.
Only 1 in 10 medicines brought to the market is considered a true innovation and
important therapeutic gain defined by clinical advantages for patients. Vice versa 9 in 10
medicines have no or only marginal clinical advantages for patients (Light and Warburton
2011; Godman, Oortwijn et al. 2016; Schwabe and Paffrath 2016; Techniker
Krankenkasse 2016).
In oncology – a clinical field of special interest due to the many new medicines (30% of
all new approvals, 12-14 each year), high cost-intensity and many medicines with
marginal benefit even expressed by Clinical Societies (ESMO (Cherny, Sullivan et al.
2015) , ASCO (Schnipper, Davidson et al. 2015), NCCN (Nardi, Wolfson et al. 2016)) -
an analysis of all medicines out approved between 2009 and mid 2016 (n=134) showed
that only 22 (18%) increased overall survival by more than 3 months (Grössmann and
Wild 2017), while for 37 medicines (27%) neither data for progression-free survival nor
for overall survival was available at the time of approval.
New payment models that reward any new medicine irrespective of the therapeutic value
they bring can, in fact, be detrimental to the social value of R&D efforts compared with
alternative discoveries.
Innovative payment models for high-cost innovative medicines
23
In the view of the panel members, not only governments are concerned with
developments (high medicines prices and few medicines with more than marginal
benefits) that the given regulatory system to set incentives is not delivering innovation
but rather leading to exploitation (e.g. orphan designations), but also public institutions
and non-governmental organizations (NGOs) express their concerns. Among such public
institutions we can refer to the European Social Insurance Platform (ESIP) (European
Social Insurance Platform (ESIP) 2016) and the European Hospital & Healthcare
Federation (HOPE) (European Hospital & Healthcare Federation (HOPE) 2017). From the
NGOs group, we have Health Action International (HAI): Keys to improving access &
Innovation of needed Medicines (Health Action International (HAI) 2016) and European
Public Health Alliance (EPHA) (European Public Health Alliance (EPHA) 2017). Even
Medical Societies start to express their concerns and provide support to distinguish
between medicines of no or marginal benefit and those of true value to the patients.5
Managed Entry agreements can be analysed by type of instrument (say, outcome
guarantees, price capping, patient/dose dependent discount, price/volume contracts,
etc.) or by type of impact (say, treatment interruption if the medicine is not effective
according to pre-established targets, application of discount if the medicine is not
effective or less effective than expected, cap on number of doses/total cost reimbursed
per after which the manufacturer assumes the cost, etc.).
MEAs should not become a quick-fix solution to introduce expensive medicines but be
integrated into a process of managed introduction of new medicines which starts from
horizon scanning activities, moves to forecasting, HTA assessment, pricing and
reimbursement, and continues with post-marketing studies and surveillance. Thus, MEAs
are a useful tool in a more global process of setting payment models for innovative
pharmaceutical products, and are complemented by other instruments available (as
discussed later in this Opinion).
MEAs can include price-volume agreements, outcome guarantee, coverage with evidence
development, and disease management programmes.
According to Ferrario and Kananos (2013), risk-sharing agreements performance-based
agreements, patient access schemes, etc., are common terms to designate particular
managed entry agreements. The roles of budget impact and cost-effectiveness
5 For example, the European Society of Medical Oncology (ESMO) (Cherny, Sullivan et al. 2015), the American Society of Clinical Oncology (ASCO) (Schnipper, Davidson et al. 2015), and the National Comprehensive Cancer Network (NCCN) (Nardi, Wolfson et al. 2016).
Innovative payment models for high-cost innovative medicines
24
considerations differ across countries in their use of MEAs (see the discussion in Ferrario
and Kanavos, 2013, for further details).
The diversity of contracts and agreements can be organized according to different
taxonomies.
Figure 1 provides one possible taxonomy, proposed in Ferrario and Kanavos (2013).6 A
synthesis of the literature on the taxonomy of MEAs is provided in KCE (2017). Typically,
taxonomies cross in different ways four key elements of MEAs: (1) financial-based versus
health outcomes-based agreements; (2) population level versus patient level
agreements; (3) performance-related measurement, or not; (4) role attributed to further
information/evidence on product characteristics.
Figure 3: A taxonomy of Managed Entry Agreements
Source: Ferrario and Kanavos (2013) 6 Two alternative typologies are presented in the annex. The central features do not differ considerable across typologies.
Innovative payment models for high-cost innovative medicines
25
2.1.3. Strategic analysis of MEAs
The MEAs anticipate access to the new product at the cost of delaying some steps of the
standard process for taking the new products to the patients (the exact process differs
across countries). The anticipation of entry decreases one type of problem, delayed
access – a good new product reaches sooner the patients. As elements such efficacy and
safety are monitored along the way, a different problem emerges – the use of products
that have a performance that under normal conditions would not lead them to be
approved. As withdrawal may be difficult, as would be seen as cutting access to a
product by the population, unless serious issues of safety become apparent, the
anticipation substitutes one type of problem by another (Van de Wetering et al. (2017)).
Of course, an automatic and credible rule of withdrawing the product when authorisation
and economic standards, as reflected in each payer’s procedures for reimbursement, are
not ex-post met would allow anticipation while also reducing the risks of the second
problem. The key aspect is credibility of such mechanism.
From the literature, there seems to be a general agreement that MEAs can, under certain
conditions, help to address post-authorisation uncertainty and enable patient early access
to innovative treatments. In general, MEAs offer flexibility in dealing with new and often
expensive technologies, which are characterised by significant levels of uncertainty about
their effects. Still, as described previously, there is an element of exercise of market
power present in the high prices asked that is not addressed by MEAs by design.
The use of MEAs can be characterized in strategic terms, using a strengths-weaknesses-
opportunities-threats approach, described in detail in Ferrario and Kanavos (2013). The
variety in types of MEAs results from the particular aim in each case (according to
whether it is the financial budget impact or the uncertainty in the information from
clinical evidence, or eventually both, a different type will be used). A review of strengths
and weaknesses of each type of MEA can also be found in KCE (2017). The ability of
MEAs to bring useful information in practice seems to fall short of expectations. Aspects
that seem to contribute to this finding are the short time span of the use of MEAs, the
small number of patients typically involve, and selection of patients receiving the
pharmaceutical product (after being approved) included in the MEA. The discussion, still,
does not address the crucial issue of price determination mechanisms.
The strong points of MEAs are different for distinct stakeholders (health care payer,
patients, companies), as each focus on a different main objective (for example,
respectively, budget control, access, obtaining reimbursement with a non-disclosed
price). On the weaknesses side, the main one identified in Ferrario and Kanavos (2013)
and in KCE (2017) is the absence of support to the expected gains. Another major
Innovative payment models for high-cost innovative medicines
26
weakness is the costs associated, which seem to have been larger than anticipated by
health care payers (monitoring requirements do require specialized resources from both
sides, health care payers and companies). The non-disclosure conditions on the exact
terms and results of MEAs, part of the agreements set, lead to lack of transparency and
difficulties in assessing whether or not objectives are achieved.
Opportunities identified range from use of additional information on real-use
characteristics of new products (ranking high in health care payer perspective) to faster
access (ranking high in patients’ perspective) and to public image benefits (ranking high
in companies’ perspective). From these, it has become clear over time, form the several
studies available, that information obtained is less useful than initially expected.
On the threats, it is becoming clear that heterogeneity in MEAs, across and within
countries health systems, makes difficult to have an integrated approach at the health
care payer level. In addition, both price setting and data collection (evidence) by
companies may adjust to the conditions required by the MEAs. Quick examples are
upward price adjustments by companies under the expectation that discounts will be part
of the MEA and leaving data (evidence) collection to later stages, within the context of
the MEA. That is, the starting points of the initial MEAs may not be representative of
future MEAs, as economic agents adjust to their existence. On the side of pharmaceutical
companies, as health care payers require further information and monitoring systems,
costs of engaging in MEAs can escalate.
Overall, the SWOT analysis of Ferrario and Kanavos (2013) does change in its main
messages with more recent information on MEAs, with the broad message being centred
in the complexities and heterogeneity of MEAs bringing less information and higher
management costs that were presumably predicted.
2.2. Health system performance
The health system performance of current payment models has concentrated on the
overall growth in pharmaceutical expenditure, putting pressure on third-party payers,
whatever their nature (public, private or non-profit entities).
Expenditure by payers is a combination of several elements: how many products are
included in the health insurance coverage (public or private)? How much are patients
sharing the costs at the moment of use? Are there limits to consumption set by payers?
How fast prices are rising and what mechanisms counteract on the ability of companies
to raise prices of their products? How institutional mechanisms facilitate high prices by
companies?
Innovative payment models for high-cost innovative medicines
27
For example, the accepted association between value and prices has led to a practice of
indication-slicing to secure higher prices, as once a price set for an indication, typically
the more cost-effective one to command a larger price, an umbrella extension of prices is
beneficial to manufacturers and non-discriminatory to patients (although, at very high
cost to health care payers).
Health system performance in the use of pharmaceuticals can also be addressed in terms
of future health and system challenges, to contribute to better health outcomes through
equitable improvements in access, quality, coverage, and use of pharmaceutical products
and related services.
Pharmaceutical systems strengthening is the process of identifying and implementing
strategies and actions that achieve coordinated and sustainable improvements in the
critical components of a pharmaceutical system to enhance responsive and resilient
system performance for achieving better health outcomes. The critical components of a
pharmaceutical system are its core functions, structures, the supporting health system
resources, and an enabling policy, legal, and governance framework).
Following the list of components for the measurement framework of health systems, the
following aspects can be considered as relevant dimensions: (a) Policy, laws and
governance; (b) Regulatory systems; (c) Pharmaceutical services; (d) Human resources;
(e) Financing; (f) Information and (g) Innovation, research and development,
manufacturing, trade.
The impact of medicines on health care costs occurs through three main channels: prices,
quantities (consumption levels) and cost off-set, when spending more in pharmaceutical
products implies spending less in other types of care (Lichtenberg, 2007, among others).
The difficulties of the current payment models to health systems performance became
apparent with the first case of a high volume – high price medicine (Sovaldi), which was
a pre-announcement of forthcoming medicines asking for a very high price and not
restricted to a small number of patients.
Innovative payment models for high-cost innovative medicines
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3. Properties for payment models of innovative medicines
3.1. Role of directing R&D
Payment systems for innovative pharmaceutical products have to provide the correct
signals, from a social point of view, for private R&D investments. As stated in EXPH
(2016b) “Creating incentives for and rewarding innovation involves two approaches: a)
compensation for the costs of developing a new product; and b) compensation for the
value of the innovation to encourage the development of products that are more highly
valued than others because they address a more important therapeutic gap.”
This view has several implications about the several roles performed by payment systems
in fostering innovation and what are desirable features of innovation that should be
incentivized. A first consideration is that new payment models should implicitly direct
R&D efforts to development of breakthrough products. The opinion in EXPH (2016a)
introduces a notion of disruptive innovation in health care suited for the European health
systems, “disruptive innovation” in health care as “a type of innovation that creates new
networks and new organisations based on a new set of values, involving new players,
which makes it possible to health improve outcomes and other valuable goals, such as
equity and efficiency. This innovation displaces older systems and ways of doing things”
(EXPH, 2016a, p.23).
Thus, payment systems that reward truly innovative products may have to be flexible
enough to adjust for novel ways and cultures of providing care, in case disruptive
innovations, in the sense above, emerge. Within the context of new pharmaceutical
products this is made possible due to the research frontier that combines products for
specific areas and for the combination of diagnostic and treatment products. In sum, new
payment models need to reward more innovate and disruptive products more than
incremental ones. The difference in rewards will drive efforts towards more valuable
innovations (to society).
But since truly disruptive innovation is mostly unpredictable in its effects, it is not
feasible to define ex-ante a payment model general enough that can be optimal in all
future contingencies. This raises a problem of “what comes first” as incentives for R&D
efforts that may lead to disruptive innovation depend on the payment model that will be
adopted, which in turn may be a function of R&D efforts. Still, some principles should be
present in the payment model.
Innovative payment models for high-cost innovative medicines
29
Payment should be made for products that are worthwhile. In this assessment, the
value-based health care approach provides a methodology to measurement of results
that matter to patients that should pursued. Note that identification of relevant
dimensions of benefits and the definition of measurement approaches do not force a
particular mechanism for price determination to be adopted.
Another principle to consider is that new payment models should not be based on paying
for R&D costs incurred. Payment models that are solely based on costs incurred provide
an incentive to companies to inflate costs as a way to secure higher payments. A “cost
plus” approach to pricing would not respect the principle above of providing incentives for
new products with high benefits to patients. As it will be argued below, cost transparency
is important though not as the way to build the price that rewards innovation.7
Taking the principle that payment models need to be related to “outcomes that matter”
for patients, it follows that no general pricing rule can be set ex-ante. The payment
model must then establish a procedure that will lead to a price. Such procedure may
involve sophisticated methods to define “what matters” for patients and which payers are
willing to pay for, and may involve price adjustments over time, as information about the
true value of the product is revealed. The use of contracts for payment may replace a
simple price announcement.
The identification of a therapeutic gap can be done in the short run, starting with a
preliminary meeting with relevant country representatives of those countries willing to
participate in a joint procurement for innovation initiative (with intellectual property
rights eventually accruing to the consortium of countries or health authorities launching
the initiative).
The identification of therapeutic gaps to be addressed under novel procedures, such as
centralized procurement for innovation, needs to be performed by decision makers in a
multi-country effort. Health authorities and scientific societies in the health sector are
natural entities to help with such identification.
3.2. Role of affordability to health systems and to patients
Health systems pursue several objectives, which can be summarized in universality,
equity, sustainability and high quality of health care services. For both equity and
sustainability, affordability of new products is key. Affordability implies that prices asked
are within financial means (of the payer and/or of the patient). In the context of public
7 The properties of this type of payment model are presented, for example, in Laffont and Tirole (1993).
Innovative payment models for high-cost innovative medicines
30
health care systems with limited budgets, affordability means that budget funds diverted
to pay for the new product do not exhaust the budget or imply strong, and harmful,
reductions of healthcare services elsewhere in the health sector. For private insurance
models of financing health care, affordability translates into the ability of the insurer to
pass-through increased costs to contributions of citizens (insurance premiums, wage-
related contributions, etc.).
Affordability results from the health system design and value of payments that have to
be done by payers (public health systems, private insurers, or copayments and out-of-
pocket payments by patients). Payments to providers of health care, including
pharmaceutical companies selling medicines, will cover their costs and their profit
margins.
Higher affordability to institutional payers can be achieved shifting costs to patients
through higher cost sharing rules (which, in turn, decreases affordability and financial
access to patients, typically in an inequitable way). Affordability to institutional payers
can also be achieved by limiting the volume of patients to be treated, which results in
access issues and eventually too much rationing in access to treatment. Thus, a balance
between affordability to institutional payers and to patients needs to be achieved. The
innovative payment models have to contribute to achieve this balance.
A subtler point is the avoidance of multiple payers, as double health insurance coverage
(say, by health insurers and by public hospitals) may lead to cost-shifting strategies from
one payer to the other, with the likely effect of increasing overall costs. This is an issue
that is not specific to pharmaceutical expenditure, though it may also arise here.
One popular theme in the discussion on access to new pharmaceutical products is the call
to drop the “silo mentality”. This has two main arguments by performing efficiency
assessments of health technologies and interventions, health systems can discard those
of low efficiency, freeing up resources to be used elsewhere in the health system, most
notably in paying for access to new pharmaceutical products. This means substitution of
spending across areas (“silos”) in the same temporal moment. The second argument is
that by spending today in pharmaceutical products that avoid future need of health care,
such expenditure is seen as an investment that brings lower expenditure in the future in
other areas. There is an intertemporal substitution in spending across areas (“silos”) of
health care. Both arguments highlight the point that efficient use of resource may imply
higher expenditure in new pharmaceutical products by health systems and that resources
to pay for it may result from avoidable expenditure elsewhere in the health system.
Innovative payment models for high-cost innovative medicines
31
These arguments, however, do not call for a particular system of price determination for
new pharmaceutical products and do not call for a continued rising in the prices of new
pharmaceutical products. They do call for a continuous consideration of optimal spending
of available resources in health care. This can imply reallocations towards
pharmaceuticals, but also towards primary care, prevention or long-term care, which
ever contributes most efficiently to the overall health system goals.
It is consensual that new pharmaceutical products must be subject to a rigorous control
regarding efficacy, safety and quality, as reflected in current regulations in Europe. It is
becoming widespread the view that efficiency considerations of new products are also to
be assessed, as shown by the increasing use of health technology assessments in the
context of economic hurdles in the reimbursement decisions in most countries. Under the
efficiency heading one includes also programs aimed at better prescribing patterns.
The use of generics and biossimilars is often regarded as a contributing element to lower
the financial pressure on health care payers. In that line of argument, they open budget
space to pay the new innovative products – whether these are pharmaceutical products
or not.
All these areas for public policy interventions have merit though they arguably do not
address the fundamental tension on the pricing of new pharmaceutical products between
access and innovation incentives. In particular, the mechanisms driving up prices are not
addressed by policy measures regarding generics and biosimilars. These policy measures
have merit on their own and should be pursued under the objective of reaching the best
possible use of scarce available resources.
3.3. The role of intergenerational transfers
Innovative pharmaceutical products benefit from patent protection. After the patent
expires, these products can be produced and sold by any manufacturer as long as they
have the same qualitative and quantitative composition in the active substances in the
same pharmaceutical form and for which bioequivalence with the reference medicine has
been demonstrated. This brings competition to the market, and typically lowers the price
of medicines. One of the rationales behind the patent system, is that the costs of R&D
can be recouped during the patent period. Thus, future patients will not (need to)
contribute to the payment of R&D costs. This corresponds to an intergenerational transfer
with benefits for future generations. Of course, if the life cycle of the new medicine is
approximately equal to the patent duration, no such intergenerational transfer takes
place.
Innovative payment models for high-cost innovative medicines
32
Another intertemporal effect is associated with too much current use of products leading
to antimicrobial resistance, resulting in higher treatments costs for future generations.
This “externality cost” is disregarded in current payment models. New payment models
should explicitly recognize their properties and implications in terms of intergenerational
transfers. On payment models for new antimicrobials, the report on the issue by
European Commission (2017, p. 16) clearly lays down the market failure associated with
the negative global effect of antimicrobial resistance from large-scale usage of new
products. The report advocates an improvement in health technology assessment
methodologies. These are likely to require complementary insights from a broader health
system design as to incorporate adequately the need to internalize the impact on
resistance from consumption while preserving patients’ access to antimicrobials. The
context specificity of innovative payment models may be illustrated by the example of
antimicrobials. Payment for innovative medicines in this area may preferably not be
based on use, but rather on availability and sustained effectiveness – requiring
completely different reimbursement strategies.
3.4. The balance between objectives and instruments
The payment model has to satisfy several objectives at the same time: ensure
affordability of new products to institutional payers and patients, reward innovation,
cover costs of companies, promote efficient use and efficient production, etc.
The traditional payment model based on defining a single price per unit of medicine, the
linear price model, has only one instrument to achieve the several objectives. When
conflicts between objectives exist, a trade-off between them will determine the optimal
price.
Another route is to increase the set of instruments available. Innovative payment models
should use a more comprehensive set of instruments than the traditional linear price
model.
Although intellectual property protection has been the cornerstone to foster innovation by
private companies, in medicines as well as across the economy, it can be questioned
whether it can or should be replaced or complemented by other ways to reward
innovation in the health care field (say, prizes for discoveries, followed by an immediate-
generics strategy). The definition of preferential areas is, of course, debatable in the
choices it makes and these may change over time. Areas with both a) (the threat of) an
increasing burden of disease, and b) more amenable to have substantial breakthrough
gains in therapeutic value added are natural candidates to be included in novel ways to
promote R&D. But sometimes unexpected innovation with high impact emerges from
Innovative payment models for high-cost innovative medicines
33
unexpected places. At least, considering other ways to reward innovation would free
prices from being the single way to meet such objectives at the same time.
3.5. Framing health system design options
Pharmaceutical companies have proved to be quite adaptable to the economic
environment they face. They have adjusted to the new incentives to develop orphan
medicines. Some may even argue they adjusted too much, as many medicines are now
presented initially as indicated for a few number of patients in which they are highly
effective (and thus command a high price), benefiting from orphan medicines’ special
treatment. Later, expansion on indications to use of the product bring scale to activity of
companies.
The value-based healthcare trend brings the measurement of benefits (outcomes) of
health interventions, including medicines, to the frontline. By focusing on measuring
benefits and arguing with payment according to value, companies are able to set
attention of payers into the logic of paying ever more under the approach that any price
that guarantees that cost-effectiveness is below a pre-defined threshold is acceptable.
The argument implicitly assumes that “pricing by the threshold” is the adequate way to
set prices. Allowing the discussion of benefits to dominate attention leads to intellectual
capture of payers, restricting attention to a pre-determined model of payment that has
revealed the property of inducing high prices.
The focus on incentives to R&D investment (and thus higher prices for better, more
valuable innovation) should not lead automatically to the highest price possible as chosen
by companies. The approach of unchecked pricing behaviour for products under patent
(meaning not being assessed as exercise of market power by competition authorities),
common in most industries, breaks down here. The limit on very high prices for
innovative products in other industries results from sensitivity of consumers’ demand to
price – at very high prices some, or many, consumers will stop using the service or
consuming the product. In health care, the existence of health insurance protection
(public or private) eliminates, or decreases considerably, the role of demand sensitivity
to price (at the gain of the value of insurance protection). The implication is that the
standard conditions under which innovation and its pricing takes place in other industries
is not met in the case of pharmaceutical innovation, once the medicine is approved for
reimbursement. The health system design to deal with high-price innovative medicines
has to mimic (some of) the results that would occur under “standard market conditions”.
This clearly sets the discussion at the level of health system design, which provides the
background for firms’ decisions, rather than interfering directly with firms’ internal
decisions (regarding prices and R&D efforts).
Innovative payment models for high-cost innovative medicines
34
One example of the importance of adequately framing the price determination process is
given by the following procedure: if a product meets a certain criterion (a certain
threshold for incremental cost-effectiveness) then it is approved, with high likelihood, for
reimbursement. The cost to the payer that adopts this approach is given by the price
asked by the company, which leads to a focus on presenting an ever-expanding set of
benefits to the new pharmaceutical product. The potential for this effect led to the
existence of rules and guidelines on what can be presented as value, restricting the
scope for abuse of this sort. This focus increases the room for a higher cost to the payer
to be acceptable under this approach, that is a higher price asked by the company. The
development of HTA methodologies improves the technical analysis. On top of the
technical analysis, there is the issue of how negative decisions regarding inclusion of
high-price innovative medicines are politically and socially supported (or not).
Health Technology Assessment (HTA) has become widely accepted as a methodology that
unveils the value of new, innovative, products. It has the important role of making clear
when additional benefits from new products are significant. The fact that some products
have very high prices and very large benefits does not reduce the usefulness of HTA in
identifying, and eventually discarding from health insurance coverage, products with little
or no added value to society (health care payers). The use of HTA also works as a clear
commitment by health care payers to have a decision of exclusion of very incremental
innovations. HTA can be used in different ways, to send signals about innovation in
neglected areas with definition of flexible thresholds, according to unmet therapeutic
needs, across areas for assessment of new products. Improving HTA and strengthening
cooperation across countries will also provide better estimates of value of new products.
Still, improved HTA will not, by itself, solve the current pressure for very high prices of
innovative medicines.
The direct implication is that defining payment models for high-cost innovative medicines
is an issue of health system design, not an issue of finding a particular contract for prices
of a particular medicine.
3.6. Governance of new payment models
The creation and use of new payment models raises governance challenges that cannot
be overlooked. Crucial elements are the monitoring procedures and the negotiation
power on behalf of the public good. Equally essential is the credibility of publicly
announced rules. This credibility is mostly challenged in delisting products that do not
yield the initially expected outcomes. The issue that pharmaceutical products are seldom
delisted points to the importance of the political risks of not being able to remove a
Innovative payment models for high-cost innovative medicines
35
product once included in the coverage package of a health care payer. Governance
challenges are typically higher for Governments than for other institutional payers. On
the other hand, multiple payer health systems face issues of coordination across payers
on what is covered and the extent of coverage of each one. Multiple-payer health
systems have an additional problem to health care payers as they can eventually be
accused of collusion if information about payment models and values is shared and
alignment of models is coordinated.
The MEAs experience shows the relevance of these two issues. The general use of more
complex payment models for new pharmaceutical products will imply changes in health
system design. Some of the changes will likely create challenges in terms of political
feasibility, including the delisting of products that do not materialize initial expectations
based on preliminary evidence. Even if predicted in the payment model, removing
products from coverage may face the opposition of patients, even in the case of smaller
effects than promised.
The “uncertainty motive” for using MEAs should, statistically lead to some products being
delists. This bias towards inertia after inclusion is apparently a persistent phenomenon.
The alternative interpretation for non-delisting of products is that all products are highly
innovative, in which case the question being why there was not enough information
about it during the assessment by health care payers.
The governance model for new payment models has to provide a clear definition of
information to be collected, open standards for outcome measurement, decision rules
about it, openness of information, registries and ownership of data. All these matters
may require important changes in the legal and institutional settings of health systems.
Moreover, they may require a further strengthening of the ability to uphold negative
funding decisions, given the controversy these may arouse. At the same time, this
possibility increases the credibility of negotiations and bargaining power in them.
4. The instruments
The definition of innovative payment models for new pharmaceutical products needs to
consider both existing and novel instruments. Prices have been the main instrument in
the payment model, complemented recently with more sophisticated contracts.
The first line of development is, therefore, contracts that use more flexible pricing
models, including conditional payment for results, fines for negative results, etc.
Examples of instruments along this line are two-part prices, non-linear prices (such as
Innovative payment models for high-cost innovative medicines
36
different prices conditional to volume, or to different patient characteristics) and
conditional market-entry agreements.
A second line of development is to use different ways to set prices and change the
institutional setting in which prices are formed. This line includes actions that increase
the bargaining power of payers in price negotiations that may occur at different stages.
Examples are initiatives like joint procurement that may take place after market
authorisation, or the eventual use of legal rights around patents, invoking public health
concerns, which takes place during the market authorisation phase. The initiatives on
joint procurement intend to build bargaining power in the negotiation of prices, doing it
by two different forces. On the one hand, joint procurement aggregates demand from
several countries (or purchasing entities), becoming a more relevant partner to the
pharmaceutical companies than each on its own. On the other hand, joint procurement
uses a more pressing mechanism to obtain lower prices, as companies have to submit
their proposals under the uncertainty of what rivals do. Of course, the force of
competition in joint procurement is reduced when innovative products, without close
therapeutic substitutes, are being discussed, leaving to aggregation of demands to be the
most important advantage in negotiation.
A third line of development is to use different instruments to reward innovation, such as
innovation procurement, public-private initiatives, etc.
The main concern is to explore novel ways of setting prices for new medicines in terms of
improving access, while taking in to account the costs, the benefits, the budget impact
and the future return on R&D investment on a transparent manner.
4.1. Prices
4.1.1. Non-linear prices
The use of non-linear prices (that is, payment models that do not restrict payment to a
price value per unit of the product) is present in other sectors. The consideration of non-
linear price structures adds instruments to structure the payment that increase flexibility
to address the several objectives present in the definition new payment models
(promoting innovation “that matters”, patients have access to innovation, and health
systems are financially sustainable).
Combination of pharmaceutical treatments, commanding a higher price than individual
products, was observed in several cases. This raises the issue of how to deal with such
situations. This question has a strong analogy with the theory of pricing bundles. The
Innovative payment models for high-cost innovative medicines
37
new element is the combination of treatments with original components from different
companies. The more relevant point is that combination of existing products was
presented as innovation, as way to obtain higher prices.
The combination of existing products may have extra value to patients (from convenience
or from an increase in treatment compliance, for example). Costs of production do not
change considerably by making a combined product and as individual products’ prices are
already rewarding innovation, having a higher price for the bundle of products is a mere
transfer of value to companies (its effects on R&D incentives are non-existent or minor
compared with individual prices).
The analogy with other economic sectors suggests that experience from these other
sectors (transport or telecommunications) can potentially inform the development of
payment models for new medicines. The analogy is, however, incomplete because health
insurance – financial protection of patients from the random costs of health care
regarding moment and amount - is a distinctive feature that isolates to a considerable
extent payers from the price. The objective of universal access itself is shared with other
economy sectors (e.g. third-party liability insurance or home insurance,
telecommunications and other utilities). Also, the objective of providing insurance against
adverse events is shared with other economy sectors. Still, the combination of insurance,
consumption demand under considerable delegation (agency relationship) to a
considerable extent and universal access as policy objective is fairly unique to health
care. The fact that in other sectors, like telecommunications, innovation can be quality
increasing and price (cost) reducing over time shows the distance in context to the health
care sector, where innovation has traditionally been price increasing. Nonetheless, some
ideas can be borrowed from those other sectors: price differentials across different and
distinguishable groups of users can be welfare enhancing under certain conditions
(further discussed below).
Prices that reflect economic opportunity cost should be pursued. In the absence of
innovation, competition drives prices to their economic opportunity of production. With
innovation, patent protection is given and prices above (marginal) cost of production are
allowed.
Limits to market power exercise in other sectors of the economy in general results from
price elasticity of demand (reduction of consumption that becomes very significant at
high prices). Health insurance eliminates (or strongly) decreases the price elasticity of
demand (which tends to be low anyway). Other mechanisms to address exercise of
Innovative payment models for high-cost innovative medicines
38
market power need to be found. Health Technology Assessment has become
predominant internationally. HTA has as by-product a decision rule, based on the
incremental cost-effectiveness ratio (ICER) and its comparison with a pre-defined
threshold, that implicitly does not promote prices lower than those getting a product
below the threshold – by taking the price asked by the pharmaceutical company as the
cost to the health authority, a rule that includes in coverage of the health system
products that have a cost-effectiveness below a pre-defined threshold allows firms to
raise the price up to a level close to that threshold even if a lower value would provide
also a profitable margin to the company. There is a need to distinguish the HTA
assessment (on clinical value) and HTA appraisal (or pricing). The policy decision
involved in appraisal has to consider other societal, ethical, etc., concerns relevant to a
reimbursement decision. The policy decision may an important political element, as in
some countries final decisions may be taken by ministers or their representatives.
If there is a certain R&D amount to be funded across markets/countries that differ in
their characteristics, differential pricing is adequate but levels of prices need to be the
minimum required to collect the amount to be funded. Resulting optimal rule is based on
price sensitivity, which is influenced by each country’s health system rules.
Monopoly pricing has the same relative price structure as the one selected by a
regulatory entity but goes for higher prices (that is, in both cases users with a smaller
price elasticity will face a higher price, as there is less loss of consumption for these
users). Thus, optimal pricing from a social point of view coincides in the structure of
prices but not in price levels.
A crucial question is “What to pay?”. It is not enough that R&D is done and a new
product is discovered. It needs to provide evidence of benefit. Often, there is uncertainty
about the value of new products, so there is room for real world evidence (RWD) to
improve knowledge on market characteristics. But the use of RWD has its own
shortcomings.
The optimal time profile of prices would be low prices after discovery of valuable product
and provide reward to innovation without distorting prices or decisions. But this would
undermine rewards for R&D and consequently dynamic incentives for new discoveries (as
already discussed above).
As we do not have a competitive market for new pharmaceuticals due to existence of
patents, the analysis needs to be set in terms of bilateral (or multilateral) price
negotiations. This brings the relevance to focus on the features that determine the
Innovative payment models for high-cost innovative medicines
39
bargaining power of each side. The use of automatic, pre-determined, rules also define
bargaining power according to the particular details of the rule, including default points
(what happens if no agreement is reached).
A different, though related point, is that the “very costly” nature of new pharmaceutical
treatments is not unavoidable. Very high prices do not follow automatically from R&D
costs and such very high prices cannot be taken as exogenously determined.
The justification of high prices based on the high underlying R&D costs is often
unchecked (as none or very little information is released by companies on the costs of
R&D, which include opportunity costs of investment and failed attempts to obtain the
innovation).
The pharmaceutical industry alleges that high prices are unavoidable given the expense
of R&D to bring new medicines to the market. Several (sponsor-based as well as
independent) analyses tried to shed some light on the actual R&D expenditures a basis
for transparent price-building. The German Association of Research-Based
Pharmaceutical Companies (https://www.vfa.de/) estimates US$1-1.6 billion (Verband de
Forshenden Pharmaunternehmen (VfA) 2016), depending on calculating the cash needed
to develop one medicine or to – additionally – include the “capitalized” cost including
investments in aborted projects and lost profits elsewhere. A recent estimate from Prasad
and Mallankody (2017) sets the (median) cost to develop a cancer medicine at US$793.6
million, after accounting for the opportunity cost of capital invested, a figure significantly
lower than prior estimates (though a large interval of possible values was found, with
costs ranging from US$219.1 to US$2827.1 million).
Knowledge of R&D costs would help to scrutinize the extent of exercise of market power.
A simple hypothetical example illustrates the relevance of this element. Suppose a new
medicine takes 5 billion euro to develop (this is a value that exceeds several estimates of
the average cost of developing a new medicine, including the returns to investment over
time and failed attempts to obtain the innovation). Suppose it allows to treat 100 million
people worldwide over the life-cycle of the product. A simple computation leads to an
amount of 50€ per patient – year to cover the R&D costs. Even if the new product
reaches only 10 million patients over the full life-cycle of the product, the price tag for
R&D alone would be 500€, still far from the 5, sometimes 6, digits prices being asked for
some of the new products. Naturally, shorter periods of monopoly of an innovation
require a higher price per period to obtain the same revenue. Though, whenever the
shorter period results from another, better, innovation being introduced, it would be
Innovative payment models for high-cost innovative medicines
40
normal competition in the market place, as firms bear the risk of other companies
replacing them.
A different case may be considered for antibiotics, as resistance to them bring negative
effects from consumption. This may call for higher prices or for strategies to limit use to
the truly necessary situations.
The economics of price differentiation across markets (and indications) suggests it can
both improve patients’ access and be a strategy to increase revenues to companies. The
conditions under which price differentiation increases both affordability and access need
to be clarified.
4.1.2. Price transparency
There are several claims that price setting should be more transparent and should not be
left to industry alone.
A clear view on the issue of price transparency was already present in the EXPH (2016b)
“Opinion on access to health services in the European Union”: ”Creating greater
transparency around the costs of pharmaceutical products and the price of medicines
would provide better grounds for assessing affordability, equitable access, fairness in
pricing and incentives to develop new medicines. (p.79)
A crucial transparency element in price transparency is information about R&D and
operation costs (including manufacturing, marketing and distribution costs), without
implying, as discussed in this Opinion, a cost-plus pricing rule, as this rule does not
provide adequate incentives to R&D. The disclosure of information on costs to health care
payers is different from posting list prices and adopting price-referencing schemes. Such
disclosure of information by pharmaceutical companies can be done in a way that
preserves commercial confidentiality regarding rivals.
4.1.3. From paying pills to paying services
Market entry agreements can be the first step towards more elaborated strategies to
commission health care services from private providers. New payment models based on
outcomes (value-based health care), with bundled payments that may include bonus and
penalties related to positive and negative outcomes defined in a contract, mark a change
to simply paying for a product. This makes acquisition of medicines to treat patients
closer to the commissioning of health care services, particularly if pharmaceutical
products are used in combination with diagnostics or/and treatment involves combining
several pharmaceutical products. (Jonsson et al., 2016)
Innovative payment models for high-cost innovative medicines
41
Market entry agreements based on outcomes have strong demands in terms of data
collection and its interpretation, making it difficult to work in every case.
Market entry agreements may address one or both of two issues: a) uncertainty about
the effectiveness of the new pharmaceutical product, and b) lower prices demand by
payers of health care, without jeopardizing other markets through the links of
international reference pricing.
More elaborated payment structures, like two-part tariffs, are mentioned in Jonsson et al.
(2016) “A two-part tariff, including price volume agreements and different prices for
different uses is common in many markets characterized by large investments (for
instance, transport, energy and telecoms) and could potentially improve the situation”.
A potential avenue in the development of a new framework to payment models for high
cost innovative medicines is to move from buying pills to buying services. It also changes
the role of pharmaceutical companies from sellers of a product to partners in the
provision of services. There are challenges in this avenue. A major one is the
commissioning of the service and what is required to do it – expertise and strategy to the
service commissioned, as detailed in EXPH (2016c).
New payment models that move from paying pills to paying services will have a concern
and explicit recognition of the role of patient compliance as part of the what is included in
the relationship between payer and service provider.
4.2. Innovative procurement initiatives
One way to increase the set of instruments available is to consider different ways to
stimulate innovation besides the “promise” of prices after the innovation is obtained.
Possibilities are the creation of partnerships for neglected diseases, with examples
coming from tropical diseases.
Development of early relationship between regulators and pharmaceutical companies
may also help to guide R&D efforts, though a careful analysis of advantages and
drawbacks needs to be carried out. Whenever neglected areas can be detected and a
consensus on the opportunity to have innovation is established, using available
instruments (soft ones, as joint horizon scanning discussions, or hard, as price or reward
commitments) can improve innovation value. In such approach, R&D and product market
Innovative payment models for high-cost innovative medicines
42
competition should not curtail open research by companies, as breakthroughs may occur
in unplanned ways.
A more active role for health systems to commission innovation may be considered as
well, although given the global nature of pharmaceutical markets, it needs to be carefully
crafted (so that one country does not subsidize the R&D that benefits all others). Other
ways than patents to stimulate innovation other than prices can be considered. One
possibility for new modes of innovation is provided by the Triple Helix concept (Ranga
and Etzkowitz, 2013), which requires the active involvement in a partnership of
universities, industry and government. An example of the Triple Helix model of
innovation is the development of radiotherapy innovations by the Karolinska university
hospital in Sweden, together with other university hospitals, several private companies
and government support.
4.3. The incentive role of prices and of the payment model
Commercial confidential price discounts are a form of price competition, and also a way
to price discriminate across countries. The widespread use of external (international)
price referencing makes commercial confidential price discounts a way to escape its
consequences (avoid that discounts in one country have consequences on the pricing in
others). The country receiving the price discount has the incentive to agree with it, as the
benefit to the other countries from lower prices induced by the reference price
mechanism is not internalized. More importantly is that in the absence of the secrecy, no
country would benefit from a discount. This may allow some countries to have products
available compared to a policy of equal prices in countries where the product is sold. In
the case of new pharmaceutical products, competition can occur only across therapeutic
substitution possibilities during the life of the patent.
The belief that that low prices are slowing the process of medicine development
worldwide is contradicted, to some extent, by the move of major companies to change
their business model years ago. They reduced the efforts to discover new medicines
themselves and instead opted into buying the discoveries of other, smaller, companies,
specialized in the early development of molecules. So-called Partnered Development
Programs focus on the discovery and development of molecules in small Biotech
companies and processed (commercialized) towards market authorization by large
pharmaceutical companies.8 The incentive role of prices in directing innovation efforts is
mediated by these business strategies, weakening the signal they may transmit to initial
R&D efforts.
8 Those Partnered Development Programs are legally regulated under “Asset Transfer Agreements” (2013).
Innovative payment models for high-cost innovative medicines
43
A major issue to be explicitly recognized is that exercise of market power (meaning that
prices are well above a benchmark of “fair return” on investment, including R&D
investment) is present and it is a result of the current institutional framework. As
mentioned in the European Parliament’s Report (p. 10) “value-based pricing of medicines
can be misused as profit-maximisation economic strategy, leading to the setting of prices
that are disproportionate to the cost structure.” The EU competition legislation can have
more role here, although the intervention against products under patent protection is
delicate. It is probably more adequate to address at a more fundamental level the
institutional aspects that allow for high prices to be set in the first place. In particular,
price determination mechanisms need to be addressed explicitly.
For example, it should be avoided that principles expressed as “price and reimbursement
levels of medicines should correspond with an acceptable value for money from a societal
perspective” (Annemans and Pani, 2017, p.2) translate into the maximum acceptable
price through the prevailing institutional arrangements. Value-based pricing does not
mean that providing price signals (economic incentives) to true therapeutic added value
equates to high prices allowing companies to capture all possible surplus. The
institutional framework and its governance should use the different methodologies and
approaches, including value-based health care and HTA, in order ensure that those
innovations that do not offer value for money (in the sense of costs to payers/prices
asked by companies exceed social benefits) are excluded from coverage and that those
included in coverage are awarded prices that reward innovation with a reasonable return
on investment and have a fair distribution of social surplus generated.
The incentive signal provided by higher prices for products that bring more value added
cannot be taken to mean that excessive prices are acceptable and that unchecked
exercise of market power can be done by companies, especially in a context where price
elasticity of demand is severely reduced by health insurance protection mechanisms
(either public or private).
HTA was developed to inform decision making. In its original form, an economic
evaluation, typically part of an HTA, investigates (in some relevant way) whether benefits
of a technology exceed its costs. The price of a medicine (which includes both true costs
and margins) is often taken as exogenous and included as a ‘cost’. HTA indicates at
which price a technology is no longer welfare improving, hence above which price society
should at least not pay. Products unable to meet that price should not be purchased or
used. If the price stays below this maximum, it can be seen as welfare improving to
Innovative payment models for high-cost innovative medicines
44
implement the technology. However, also in those cases, a negotiation may still be
necessary, because price is not equal to costs in many cases. Paying up to the maximum
(which may be an effect induced by having transparent thresholds – lowering too high
prices, but increasing prices below ‘threshold-prices’) means transferring all surplus to
the manufacturer. Paying marginal costs means transferring everything to society
(though undermining R&D incentives). The result of negotiations will likely depend on the
bargaining power of both sides of the table. This negotiation of division of surplus is not a
common part of HTA, but crucial to obtain fair and sustainable prices and divisions of
surplus. It ideally requires breaking up the variable price into ‘costs’ and surplus.
Box 2
A simple, hypothetical example
Assume a new pharmaceutical product enters the market. Let us assume the costs of
R&D for X (including all necessary failures to obtain one success) totalled €4 billion. Let
us assume moreover the marginal costs of producing and delivering a full treatment
course are €1000.
We know that the total yearly population treated is 1 million patients worldwide and the
effective patent period for the product is 8 years.
The health gain in the treated patients is 0.2 healthy life year (QALY) per patient.
This implies that in order to recover the R&D costs, during the patent period, a yearly
sum of (€4 billion / 8 years =) €500 million needs to be earned. Given that 1 million
patients are treated per year, this means that per patient (€500 million / 1 million
patients =) €500 per patient needs to be paid. In addition to these R&D costs, the
marginal production costs of €1,000 per patient need to be covered.
This means a total cost per patient of €1,500. At this price, the producer would be
reimbursed for the incurred costs (without any margin).
Decision making about the medicine
Innovative payment models for high-cost innovative medicines
45
Assume that some country needs to decide on reimbursing this product. The country
uses HTA and has a decision rule that it pays not more than €100,000 per QALY (as the
social willingness to pay for an additional life-year is €100,000). The costs as described
above are unknown to the decision-making body. They only know the price that the firm
asks, which is €20,000 per patient.
An HTA demonstrates that at the price of €20,000 per patient (and treating the price as
costs), the incremental cost-effectiveness ratio (ICER) is €20,000 / 0.2 QALY or
€100,000 per QALY. This just satisfies the applied threshold, so that the country could
decide to reimburse the medicine at this price.
Note that accepting this price means that society transfers all surplus to the producer.
Moreover, in the HTA procedure prices are treated as costs.
Negotiation of division of surplus
At marginal costs, including coverage of R&D, price could have been set at €1,500 per
patient as indicated above. This would imply an ICER of (€1,500/0.2 =) €7,500 per QALY
.
Negotiation could divide surplus somewhere in between the €1,500 (under that the
producer is unlikely to accept – although even down to €1,000 would be better than
nothing as anything above it covers R&D at least somewhat) and €20,000 (above that
society is not willing to pay).
It needs to be stressed that both prices give the same benefit to patients. They do imply
important differences in terms of divisions of surplus, budget implications, etc.
Some lessons from this simple example
HTA gives a maximum price that is still acceptable, given the health gain produced by the
product. More health gains, i.e. more value, can translate into a higher price, so that
better products can be rewarded.
Having a maximum price avoids higher prices than the threshold allows (given health
gains). If the company would have asked more than €20,000 for the product, and the
Innovative payment models for high-cost innovative medicines
46
government sticks to its decision rule, the product would not be reimbursed, since then
its ICER would exceed €100,000 per QALY.
But some problems are also clear: (i) HTA does not distinguish between costs and prices.
Typically lacking information on costs, it is not able to. It hence commonly treats prices
as costs in the analysis, but these are not the same. (ii) HTA says nothing about the
optimal price of a product. It ‘merely’ indicates whether a maximum price, based on
value produced, is not exceeded. (iii) HTA says nothing about negotiation range since
normally costs are unknown. It can indicate how much a price needs to be lowered in
order to meet the threshold, if initially above it, but is silent about optimal pricing below
the threshold. (iv) Depending on the exact comparator situation, having this decision
framework may have a downward effect on prices for highly priced medicines (given their
benefits). They will then be pushed down to the threshold price. The same decision
framework may also have an upward effect on prices of medicines otherwise priced below
the threshold price. The latter may be priced up to the threshold, since this price is still
‘acceptable’.
A fair division of surplus, hence ‘fair pricing’ or ‘optimal pricing’, should be based on two
important reference points: the lowest possible price the manufacturer requires to cover
costs and the highest price society is willing to pay. These two can be fairly close
together (meaning a price close to the threshold price is optimal and that costs make up
major part of price). They can also be far apart (meaning that a price far below the
threshold price is optimal and margins take up major part of price if set close to
threshold price).
Different instruments are used for different, sometimes conflicting, purposes. Some of
the instruments attempt to bypass implications of other instruments. A main example, as
mentioned above, is the use of commercial confidential price agreements between
companies and payers to avoid international price referencing by other countries’ health
systems.
Innovative payment models for high-cost innovative medicines
47
When the concern is about the value added of the innovation, outcome-based payments
provide the right incentives, as the price linked to outcomes helps to separate high value
medicines from low value medicines whenever companies have better knowledge than
payers of care. Also, paying more for higher value medicines provides an incentive for
investment in such medicines compared with lower price medicines. The target left
behind in this case will likely be affordability, and consequently access to the new
pharmaceutical discoveries. When the issue of concern is affordability and high prices
that hurt access to the new product, reinforcing the bargaining power of payers or forcing
further competition among pharmaceutical companies is likely to improve this target. On
the other hand, lower prices will mean less gain from conducting R&D, which will mean
over time less innovation. Health benefits will be smaller under low prices. A balance
between competing targets has to be achieved.
4.4. Searching for a new institutional design
4.4.1. Prices set by explicit negotiation
Any payment model involves an explicit or implicit allocation of power to set prices, even
if a rule is defined. In a free private market, companies name prices and consumers
decide to buy or not the product. The power to set the price is with the firm. It is limited
by consumers’ decisions. Under a rule that says that a product is accepted to coverage
by a health care payer as long as it meets a threshold for (incremental) cost-
effectiveness, the power to set prices is with the company and the “demand” decision is
basically and “all or nothing” decision. Thus, the power of the firm to set prices is capped
by the threshold limit but essentially free below the threshold. By providing arguments
and evidence of more benefits (more value from the product) companies can relax the
constraint on prices exerted by the threshold implicitly or explicitly used by the health
care payer.
Under cost-plus price regulation, the power to set the price is assigned to the health care
payer (or regulator) though companies indirectly regain power to set prices by inflating
costs (and in the context of R&D, more costs do not necessarily lead to the more valued
innovations being sought, resulting in too many costs for too little innovation).
International (external) reference pricing rules give the power to set prices to
governments (health care payers) through the definition of a basket of countries for
reference. Multinational pharmaceutical companies can indirectly influence the price
through their cross-country pricing strategies (including MEAs that keep the effective
prices in each market confidential).
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48
Thus, the balance of power in price determination results from institutional rules and
from agents (companies, governments, specialized bodies, etc.) decisions and
adjustment to institutional setting. Future payment models will also define, implicitly or
explicitly, a balance in power to determine prices.
Most prices of new pharmaceutical products are in fact negotiated with healthcare
payers. Thus, innovative payment models must be cast in the context of negotiations of
price. In particular, knowledge and information that provides further bargaining power to
payers should be collected. This means obtaining better and reliable information on
outcomes, and their value, resulting the use of new pharmaceutical products. Since
bargaining is about division of value generated, it is also necessary to know, at least to
the bargaining sides, the costs of obtaining and producing the new product. The
difference between value and costs is divided between the two sides by the price set.
Hence, it should be avoided to create a negotiation procedure in which all prices are
accepted as long as a certain pre-specified threshold for cost-effectiveness is met, as this
ignores the issue of fair division of value and lends all bargaining power to the companies
in the negotiation up to the highest price that meets that threshold. And higher prices
can be obtained, almost automatically in that case, by demonstrating higher benefits to
patients. Thus, without surprise, the “race of information” to show higher benefits has
dominated the discussion about value-based health care. Recognizing that a negotiation
should take place means that cost-effectiveness thresholds alone should not be
determining prices.
A similar position was recently expressed by the WHO (2017), in which a rebalancing of
negotiating power is called for. Still, the examples reported in WHO (2017) are in the
current institutional setting. Other ways to change the terms of negotiation should be
sought. Knowledge of how value created is divided between the different parties will play
a role in negotiations. The use of mandatory licensing (with royalties for patent use being
determined by judicial decision) is another way to leverage negotiation power to payers.
It does not mean that mandatory licensing will be used widely. It is in the interest of both
sides (payers and manufacturers) to find a mutually convenient price. The possibility of
mandatory licensing merely avoids that failure of negotiations over price results in the
market not being served. Thus, in the great majority of cases, one can expect prices to
be set by agreement. The use of mandatory licensing works as a way to rebalance
bargaining power towards payers of health care (Scherer and Watal, 2002).
The use of negotiation procedures is not without risks to health care payers. An
important risk is the political economy risk of Governments (or public entities) not being
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49
capable of saying “no”. Thus, an important element of strengthening the bargaining
position of the public sector as health care payer is to align Government (or public
entities) and public opinion positions. Hence, the negotiation process is even more
complex as both negotiators (say, a firm and a government) have multiple stakeholders
(or shareholders) whose interests they need to consider and who they have to account to
(also in a political / electoral context or through shareholder meetings / stock-markets).
4.4.2. Real world data
If prices are set unrelated to underlying R&D costs, it is far from clear that lowering R&D
costs by agreeing on the use of “real world data” (RWD) to fast track products to the
market will provide for lower prices. In the discussion about RWD, its ownership is an
important aspect. The issue of IT-infrastructure as prerequisite needs to be thoroughly
addressed (who makes the investment, how is it paid for, etc.)
Transparency of choice of RWD data to be collected (outcomes), of processing
(independent data management) and of reporting of outcomes creates challenges.
RWD use in this area seems to get quite some attention. Transparency and independence
of interests of RWD data collections could be the shared principles, SOPs on how to
proceed need to be set.
The evidence produced by real world data will not be as strong as evidence from
randomized control trials, but on the other hand allow for other effects to be factored in.
This area justifies getting more insight into the several aspects mentioned above before
carefully evaluating the potential of RWD.
4.4.3. Patent laws
There is an initiative (within WHO) of analysing legal models of change of protection by
patent-laws, proposing to extinguish the protection once twice the amount of realized
investments in R&D were earned.
This sort of proposal needs to incorporate the adjustment by market players because
companies will just spend to increase the costs that will keep their protection longer. This
is a variant of cost-plus regulation of prices, which leads to inflation of costs. It will
require validation of R&D costs, which will be quite difficult to do in a global market. Still,
as discussed below, the role of patent laws should be rethought.
For pharmaceutical products, where negotiations about prices of new products are
common, patent laws tilt bargaining power in favour of pharmaceutical companies.
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Patent protection means that when negotiations health care payers and pharmaceutical
companies fail, the new product is not accessible to patients under the health care
system. Current international rules on intellectual property rights (in particular, the
TRIPS agreement), on the other hand, provide a route to introduce new products under
the call for public health interest. It involves a risk of costly litigation. Still, this possibility
of invoking the public health interest shifts bargaining power away from pharmaceutical
companies. The existence of this possibility may lead to lower prices for new products,
obtained by agreement (and not by litigation).
Patents are often discussed on their role as a mechanism to provide appropriation of
gains from innovation in a decentralized way in the economy. Patents, with their feature
of providing protection against rivals, can also be used in companies’ strategies to protect
markets from entry at later stages by asking patent extensions and/or creation of linked
patents.
The patent system fosters decentralized innovation efforts. But it is important to
acknowledge that regulatory frameworks for innovation in the health sector make patents
expensive to obtain, and small and medium firms are largely cut off from access to
patent and bring to the market their own innovations. It has become increasingly
common to for small and medium firms developing pharmaceutical innovations to have a
strategy of being bought by large companies with the resources and knowledge required
to bring new products to the market.
4.5. International cooperation
4.5.1. Platform for stakeholders' dialogue
International cooperation, at different horizontal levels, is highly desirable. Countries can
benefit from sharing experiences of different innovative payment models and from
developing a common framework on issues as transparent price setting, on RWD-
frameworks and reporting, among others. It is likely that one-size-fits-all solution cannot
be found. Still a common set of principles should exist. Countries hosting large
pharmaceutical companies are also affected by the common challenges and can benefit
from international coordination.
Synergies can be developed between the payers, HTA bodies and regulators in the EU in
terms of shared intentions: sustainable and resilient healthcare systems. Patients’
representatives and professional associations can also be relevant stakeholders.
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51
Pharmaceutical companies set R&D efforts having in mind the global market, and as such
dialogue platforms may form a global view about more fruitful directions for new
research, as valued by health systems/payers.
Some of bodies or organizations where contacts take place should involve high-level
representatives from pharmaceutical companies. A dialogue about problems and
solutions, and future directions of policy measures and R&D efforts can benefit all.
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Box 3
International collaboration
In 2010 the European Medicines Agency (EMA) initiated – in collaboration with EUnetHTA
JA2 – a pilot project on parallel scientific advice with National HTA agencies that allowed
companies to receive advice from the regulator as well as from the HTA-bodies. The aim
was to explore the levels of communalities between EMA and HTA. The analysis was
based on 31 parallel procedures (scientific advices). The level of agreement was highest
for questions on patient populations (77% agreement, 9% disagreement, 14% partial
agreement), while disagreement were more prevalent for questions on comparator (30%
disagreement, 25% partial agreement), overall efficacy and safety data necessities
(strategic questions and safety database) (23%/ 18%), study design characteristics
(randomization, treatment duration, dosing, statistical analysis methods) (21%/ 19%),
endpoints (primary efficacy endpoints, PRO and HRQL, secondary endpoints not including
PRO, clinical relevance of the effect size (12%/29%) (European Medicines Agency (EMA)
2016; Tafuri, Pagnini et al. 2016). At present limited information is available on content
and outcome of Scientific Advice (EMA) and Early Dialogues (EUnetHTA). In the interest
of justifying the use of public resources for Scientific Advice and Early Dialogue initiatives
it is necessary to understand whether, or not, the objectives were achieved. To avoid
unintentional effects of confidential Scientific Advice and Early Dialogue, they should be
conducted in the public domain allowing public debate about requirements for medicine
approval.
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Figure 4: Level of Agreement for Clinical Trial Domains
Source: Tafuri, Pagnini et al. 2016 Note: (blue: full agreement, red: partial agreement, green: disagreement)
On the aspect of knowledge about how innovative pharmaceuticals perform in a
population context, a promising route is to have collaborations for information sharing set
in a decentralised way. This would allow for self-constitution of teams that may explore
further ideas on health outcomes measurement, person-centred care and payment
models.
4.5.2. Structured cooperation
The notion of voluntary structured cooperation between health systems has been
advanced as a potentially useful framework to increase access to innovation (West,
2017). It involves creation and operationalization of thematic networks (European
reference networks, health technology assessment bodies, building on Joint Action
initiatives, etc.). The European Commission’s co-funding of EUnetHTA since 2006 has to
be emphasized and the EC initiative to strengthen the EU cooperation on HTA after the
end of EUnetHTA Joint Action 3 in mid-2020. The general objective of the EUnetHTA is to
reduce redundancies in the European HTA production and therefore increase efficient use
HTA resources. The development of shared tools facilitates the cross-border HTA
collaboration.
One particular case of interest to our discussion is the use of joint procurement
initiatives, as a way to improve access to new products. By putting together higher
volume, such cooperation may reinforce bargaining power of purchasers. This topic will
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54
be taken up in more detail in the next section. Also sharing of information, on what is
expected to be available in the near and medium future (known as horizon scanning) and
on health technology assessment standards, can provide conditions for Member States to
improve access to new products (in terms of decision timing and prices). A potential
hurdle is the different degree of centralization in health care systems management across
countries. Still, a common, or at least coordinated, regulatory framework on the evidence
required by both agencies with authorisation and reimbursement decisions and health
technology assessment bodies.
4.6. Procurement and commissioning
The use of joint procurement auctions cannot address new medicines, but some tools can
be useful – joint horizon scanning, joint HTA assessment, joint price negotiation. In this
regard, the recent Commission initiative on strengthening the current EU cooperation on
HTA including support for joint horizon scanning and joint clinical assessments could be
beneficial.9 The WHO consultation on procurement practices shows diversity in the
methods used.
An important aspect is that price cannot be the single consideration, as ensuring
competition and availability of supply is important. Also, having clear and transparent
procedures is key to ensure equal knowledge of opportunities, equal treatment and non-
discrimination of suppliers. The way to set the tendering procedures needs to consider a)
the need to have several suppliers in the market willing to participate, b) production
capacity, c) frequency of future tenders, d) type of tender (and how to select the
provider or providers, if fractioning the tender is selected). A very aggressive tender
procedure in one moment in time may result in monopoly, with a single firm showing in
future tenders. This would undermine the benefits from competition that underlies the
procurement procedure. Of course, the procurement has to be made at the therapeutic
level, in the case of needs satisfied by on-patent medicines.
The WHO (2017) document provides a useful breakdown of different types of strategic
collaboration: a) central contracting and purchasing; b) group contracting; c) coordinated
informed buying; and, d) informed buying.
Informed buying is the less demanding type of collaboration, requiring only information
sharing about prices and supplies. Coordinated informed buying requires joint market
research, sharing supplier performance information and monitoring prices. Group
9 More information on this initiative can be found at http://ec.europa.eu/smart-regulation/roadmaps/docs/2016_sante_144_health_technology_assessments_en.pdf.
Innovative payment models for high-cost innovative medicines
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contracting has already joint price negotiations and joint selection of providers, from
which the participating entities will buy. The central contracting implies a single entity
defining the tender, representing all participants. Different health systems in Europe
make it unlikely to reach the level of central European contracting.
4.7. Adaptive pathways
Existing systems for approving new medicines have been criticised as being complex,
expensive, and introducing unnecessary delays into the process of bringing new products
to market. Critics have called for a “paradigm shift”, that would allow some products to
be approved on the basis of preliminary data, allowing their benefits and harms to be
monitored among those using them using what has been termed “real world data”
(Eichler et al., 2015, Eichler et al., 2012). This approach has been supported by the
European Medicines Agency (EMA), using the term “adaptive pathways”. Adaptive
pathways is a scientific concept for medicine development and data generation which
allows for early and progressive patient access to a medicine designed to meet “unmet
medical needs”. It may omit several existing steps in the approval process to expedite
the launching of medicines. These ideas have not attracted universal approval (Health
Action International et al., 2015), and others have argued that existing mechanisms to
expedite approval are already too lax, that regulators have failed even to adhere to these
mechanisms, and that this approach has failed to stimulate genuine therapeutic
innovation (Banzi et al., 2015). The following sections, which are based on a recent
more extensive analysis (Davis et al., 2016), examine some of the key areas of
contention.
First, in what conditions would such expedited approaches be used? There are
circumstances where a need for special measures is clear, but they are quite exceptional.
A second concern is the extent to which existing data systems are adequate to detect the
benefits and harms of new medicines undergoing expedited approval. Previous
evaluations have challenged the ability of these systems to detect and confirm signals of
adverse effects (Klungel et al., 2016, Mullard, 2012) and a review failed to find credible
evidence that they could detect new unsuspected events while the results were rarely
reproducible (Moore and Furberg, 2015). Thus, the burden of proof lies with those
advocating this approach.
A third concern relates to the attribution of benefits and harms to the new product. The
randomised controlled trial is viewed as the gold standard, for good reason. While
recognising that it does have limitations, specifically external validity because of the
restricted set of subjects included as compared with those who will receive the medicinal
product in routine practice (McKee et al., 1999), in the absence of randomisation it will
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56
be very difficult to determine whether any events (beneficial or adverse) are due to the
medicine or to other characteristics of the subject.
Fourth, there is sound empirical evidence of the need for existing safeguards and, in
some cases, to strengthen them. Approximately half of all new products that complete
Phase II studies successfully fail at Phase III (Hay et al., 2014). Hence, the use of such
expedited approaches could see significant numbers of products brought to market
despite being unsafe, ineffective, or both, despite the existing safeguards and
conditionalities. A particular concern with the existing systems, which could be
exacerbated by a simplified regime, is the use of surrogate end points, which although
easy to measure often overstate real benefits (Naci and Ioannidis, 2015, Prasad et al.,
2015). A further concern is that premature approval of medicines is a disincentive to
speed up the necessary evaluations.
Fifth, there are concerns that, once released onto the market, it will be very difficult to
restrict the use of products should evidence of ineffectiveness emerge, with numerous
examples of medicines that continue in widespread use despite research questioning their
efficacy or safety (Wood, 1999).
4.8. Revisit patent system and find new ways to fund R&D by results
The patent system has been the backbone of the innovation incentives system set by
modern economies. It allows for a decentralized model of innovation discovery in all
areas of economic activity and some innovations have created their own sectors over
time.
Still, Governments' involvement in promoting R&D has also increased over time under a
variety of regimes (Government sponsored research grants, tax breaks for R&D
expenditure by private entities, subsidization of facilities, sector-specific or technology-
specific grants and subsidies, etc.).
The variety of problems in health-related, and medicine-related, R&D advise a review of
the role and performance of the current system as the overwhelming dominant way to
reward innovation. Different alternative paths have emerged as proposals. Although none
of them is likely to completely replace the patent system, the use of alternatives can be a
better way to obtain certain types of innovation, on the hand, and to achieve a different
division of value created, in the specific context of the health sector.
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Given the magnitude of public funds supporting R&D in health-related issues, the call for
a "public return on public investment" has a natural appeal. Additional to the more
upfront equity considerations that are usually raised about public funding and private
appropriation of R&D benefits, efficiency reasons are advocated by some in favour of
different rules.
Possibilities are public funding to be conditioned to non-exclusive or equitable licensing,
open data and affordable access to resulting medicines (Health Action International (HAI)
2016). This would allow other companies to build on the knowledge created by public
funds, fostering competition in the subsequent R&D stages.
The Consultative Expert Working Group on Research and Development (CEWG) at the
WHO strongly recommends a multilateral global R&D convention to promote international
coordination of publicly funded R&D results and treat them as public goods (not
constrained by IP rights) (Health Action International (HAI) 2016).
It is not straightforward to find alternative ways to fund R&D efforts though in some
selected areas, other models to provide R&D incentives, to pay for innovation and to
ensure that health system's objectives are met in the best way possible should be tried.
This is particularly true when health systems identify clear areas that should be
addressed in R&D and Governments, or other entities, direct money towards such areas.
Among the potential alternatives, and deserving a more in-depth analysis of their static
and dynamic properties, we include the use of prizes (contests for innovation), the award
of multiple-step grants with success conditionality and the build-up of amortizing funds
(Hora and Bogart, 1992).
The creation of international funds, as necessary to set a global prize, has strong
coordination costs and it is more appropriate to induce innovation in an area of interest.
It is hard to envisage how such system would survive under claims of successive
innovation by companies, at least until the fund is exhausted, under a decentralized,
non-commissioned, innovation process.
Other proposals are due to Ridley and Grabowski (2006) (priority review voucher) and
Boldrin and Levine (2013) (eliminate the patent or at least reduce its duration and
scope).
5. Basic principles for new payment models
This section brings together several elements that should be included, according to the
specifics of each new product, in new payment models. It is unlikely that a broad-
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58
spectrum new model of payment can be elaborated. Thus, no single model of payment
can be reported as “the solution” to achieve all intended objectives (financial
sustainability of health systems, access of patients to innovation and ensuring conditions
for innovation that matters to take place). There are, however, principles that should be
observed when health care payers and pharmaceutical companies design and use new
payment models.
Innovation “that matters” is, for our purposes here, defined as a new product that
satisfies the following three criteria: a) innovation that addresses diseases with a high
burden to patients; b) innovation that holds a non-negligible size for the therapeutic
benefit; c) innovation that can be taken to patients in a timely and safe way.
On each particular application, the way an innovation satisfies these criteria can be made
more precise taking advantage of progress in health outcomes measurement, including
patient reported outcomes measurement, person-centred care and health technology
assessment.
5.1. Greater price and cost transparency
Current price-setting models are inserted into an institutional framework that is
benevolent with market power exercise, exacerbated by financial protection systems
(health insurance) that reduce the price-sensitivity of demand.
Fully transparent cost-based prices are not an alternative to replace the current system,
as they would promote high cost R&D efforts, irrespective of results, as a way to obtain
better prices. This being said, the lack of systematic and reliable knowledge on costs
incurred by companies is a feature that facilitates very high prices asked by
pharmaceutical companies that commercialize the new products (which may not be the
innovator firm). The reporting of cost information to regulatory bodies, even if kept as
commercial secrets, will act as an implicit deterrent on very high margins.
On the other hand, competition, when feasible, takes place sometimes by way of
"commercial confidential" price discounts. Such price competition element should not be
discarded, and advises against full posting of all prices (as it would discourage its practice
in the first place). Of course, in a world where full information on efficient costs of doing
R&D and producing new products is available and where all decisions by all relevant
economic agents can be costless included in complete contracts, prices set according to
costs and known to everyone would be optimal. However, economic activities are
performed in imperfect settings, in which full price transparency and cost-based prices
can easily be sub-optimal.
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Still, under the current and foreseeable conditions of pharmaceutical markets, greater
price transparency can be beneficial to the performance of the health care sector,
including the rate of innovation.
Use of health technology assessment and economic evaluation works as necessary but
not sufficient condition. It limits too high prices, but does not advocate lower than
threshold prices.
There is a need for more information on costs of manufacturing and about the sharing
societal gains.
A possible course of action is that firms submit an estimate of the costs they incurred and
its breakdown (R&D, marketing and productions costs) as part of the HTA assessment.
The term “costs” should be reserved for companies’ costs. What health systems/ pay
should be termed expenditures or payments, reserving “costs” for R&D, marketing and
market development, and production costs. This would make clear to institutional payers
and assessment bodies how disproportionate prices are from costs, even if it does not
make it public (and so known to competitors).
Box 4: R&D costs and the role of public funding
The recent case of the orphan medicinal product Spinraza (approved in June 2017) shows
the need for price transparency. With a price tag of €500.000 in the initial year and
€250.000 per annum as maintenance therapy, affordability to health systems is in
question. The return of public investment done in the R&D process leading to the
discovery should be known. The extensive (several million dollar) NIH research funding
has not been disclosed at time of patent filing. The failure to disclose federal funding
might lead – according to US-law - to loss of patent rights
(https://keionline.org/node/2710). A mapping of the public support that goes into
medical R&D should be conducted and the disclosure of all public funds granted for the
R&D of each new medicine approved should occur.
5.2. Changing the rules of protecting innovation
The patent system is out of balance: in the European Union on top of the lengthy
protection period, additional market exclusivity, data exclusivity and eventually
supplementary protection certificates (SPC) is granted to market authorization holders
and delays price-lowering generic competition (Health Action International (HAI) 2016).
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The practice of “ever-greening” – referring to the multi-fold ways of exploiting the patent
law (extending protection) is criticized for offering over-protection and misuse of
intellectual property rights (IP) (Health Action International (HAI) 2016).
Thus, exploration in existing flexibilities under the TRIPS (Trade related Aspects of
Intellectual Property Rights) agreement is to be seriously considered by health care
payers, namely regulatory bodies that approve prices of new medicines. This possibility
does not mean that prices will be set by courts under legal challenges invoking TRIPS.
The existence of this possibility as a real course of action available influences the prices
asked by companies in new products.10 The potential use of mandatory licensing under
the internationally accepted rules should an exception and not the rule.
It is important to recognize both the limitations and the advantages of patent-driven
innovations. In particular, decentralized innovation efforts are better served by a patent
system, and it is unlikely that innovation in health, and in medicines in particular, can be
done without a patent system in place. This being said, it does not mean that all
innovation has to be cast in the patent system.
5.3. Changing the rules in R&D funding
There is growing consensus that alternative models to finance R&D for actually needed
medicines (rather than me-too medicines) might be offered within the EU-research
system of Horizon2020 or thereafter and might lead on the long term to more innovative
medicines.
The delinkage of R&D from sales is demanded (Health Action International (HAI) 2016)
and should be explored. DNDi (Drugs for Neglected Disease Partnerships) Development
Partnerships can serve as role model (Gerlinger 2017).
Another tool is offering mid-term and end-stage prizes (Health Action International (HAI)
2016). This implies announcing a “prize” for discovery of a medicine, which is bought by
the entity awarding the prize (international consortium would be the best option here). It
then can license it for production and commercialization (eventually making it an
immediate generic product).
There are obvious problems of coordination across health systems in order to make work
other, prize-based, forms of R&D funding. Solving those problems will require multilateral
negotiations between health care payers.
10 For a related discussion, see Voluntary and Compulsory Licensing: http://apps.who.int/iris/bitstream/10665/204522/1/9789241510295_eng.pdf?ua=1
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Other alternatives are also possible, including unbundling phase 3 in development of new
products, with trials being performed by independent groups and allowing open access to
results.
Other alternative courses of action are discussed in Vandenbroek et al. (2016), including
ways of sharing the costs and returns of R&D investment in new products. These options
involve a different approach to R&D public funding, with a higher involvement by the
public sector in the appropriation of returns from the R&D it funds.
5.4. Changes in Governance
New payment models raise governance challenges that need to be addressed. Crucial
elements are monitoring procedures and negotiation power on behalf of the public good.
Equally essential is the credibility of publicly announced rules. This credibility is mostly
challenged in delisting products that do not yield the initially expected outcomes at time
of approval for reimbursement by health care payers. Governance challenges are
typically higher for Governments than for other institutional payers. Multiple payer health
systems face additional issues of coordination across payers.
The governance model for new payment models has to provide a clear definition of
information to be collected, common ways to do outcome measurement, clear and
common roles regarding ownership and privacy of individual patients’ data. All these
matters may require important changes in the legal and institutional settings of health
systems.
On existing institutions, EMA should raise its standards on analysis of new products.
About 29% of new biological products assessed by EMA received safety warnings within
10 years on the market (data from 2008 in (Light and Lexchin 2012)). The small
percentage of medicines with clinical important advantages is in contrast with the steady
increase of EMA instruments providing access to products ever earlier and with less
evidence
The current funding rules of EMA are not, generally speaking, a good way of financing
bodies with decision on issues of general interest. Such funding rules may not completely
safeguard the perception of independence of these bodies by external observers and
stakeholders. EMA should be fully funded by public funds, in order to end the potential
risk of “industry´s capture of the regulator” (Light and Lexchin 2012).
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As a relevant institution in the governance structure of bringing to patient’s new
medicines, EMA should raise the bars in assessment of new medicines, reducing the
cases of approval with little therapeutic value by a) demand for substantial benefit to
patients: Superiority or non-inferior over comparator; b) comparison to active
treatments; c) patient relevant clinical outcomes only over surrogate endpoints; d)
approvals only with mature data. Fast track approvals should be more scrutinized. It also
should be clear that Real World Data and Adaptive Pathways pose risks. There is a
distinction to be made on the evidence required for approval to market and for price
setting.
The role of EMA should be discussed, in particular policies and strategies aiming at
identification of real unmet medical needs, on the one hand, and the trade-offs involved
in a shorter time of approval versus ensuring that a sizeable benefit is present. The
importance of getting better products quickly to patients that may benefit from them has
to be balanced with too-fast approval of pharmaceuticals with marginal benefit and
asking high prices (sometimes, using an “orphanisation” strategy to provide evidence of
high effectiveness on a very small number and selected type of patients to support a high
price to the product).
5.5. Develop methodologies to measure the value of pharmaceutical products
One of the key elements in more sophisticated payment models is the ability to
accurately measure outcomes and value of new products in a continuous way.
There are several methodologies being developed to achieve the objective, including
standardised ways of outcome measurement as used in systematic HTA contexts. The
important element is that identification of relevant outcomes is made and that
measurement can be made in a clear and easy-to-understand way. It is also important to
stress here the importance of standardisation and guidelines, in order to increase
comparability (preferably across countries) of studies and to avoid a ‘race for information’
or ‘race for value’. In the field of HTA important progress has been made in that sense,
which may be further improved, but also provides a good basis. Moreover, initiatives like
EUnetHTA and ICHOM can prove important in this context. Effort should be maintained to
develop methodologies to measure the social value of pharmaceutical products and
systematically use of such methods.
5.6. Have an assessment of exercise of market power in price negotiations
High prices may have an important element of exercise of market power. The practice of
prices above production costs, made possible by patent protection, rewards innovation.
The limits to price increases are set, in other areas, by consumers’ decision of not to buy
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the product. That role of prices is much weaker in health care, as insurance protecting
patients from the financial hardship associated with health care needs also withdraws the
natural barrier to very high prices set by providers of care, including pharmaceutical
companies. There is the need to define the meaning of abusive exercise of market power
in pharmaceutical markets with help from competition authorities. This assessment may
not be turned public and be considered “commercial secret” but available to network of
public payers.
Asking competition authorities to provide input, even if informally and at the level of joint
working groups, regarding the notion of excessive prices, how to identify such situations,
and how it can be useful in price negotiations can be done immediately. It is true that
contextual elements of the health sector will have to be included in the discussion.,
though the general principle of what can constitute an excessive price in the context of
pharmaceutical innovation can certainly benefit from the experience of competition
authorities.
Competition authorities may not have the legal framework to formally provide such
advice, though informal ways can certainly be thought of. An example is the creation of
joint working groups, involving representatives from competition authorities and from
health authorities in charge of price negotiations for new medicines, to define what
constitutes an abusive price and criteria for its identification in negotiations. Informal
consultation from health authorities can also take place. Health authorities may develop
expertise in assessment of market power exercise in a similar way they developed
expertise in health technology assessment. These, and probably other, possibilities would
bring the concern about the level of prices more to the forefront of price negotiations.
The exact details of this collaboration deserve further discussion.
5.7. Set better rewards for higher therapeutic added value
Reward better value and ensure a fair division of this value between producer and buyer,
which in general is not ensured by allowing the highest price that keeps the product just
under a cost-effectiveness threshold. New payment models need to be cleverly designed
so that the correct signals are sent (higher rewards for better products) but at the same
time keeping the pressure for low prices (by mimicking a certain degree of demand
sensitivity to price).
5.8. Move towards acquisition of service rather than product
The point is to reward successful treatment instead of buying product, which implicitly
makes the pharmaceutical company accountable for the quality of its product and result
from R&D efforts. It also requires a different sort of relationship between payers and
Innovative payment models for high-cost innovative medicines
64
pharmaceutical companies, as buying services is considerably more difficult than
procuring and buying products.
5.9. Explore non-linear payment systems, including bundling, differentiation across geographies and across indications
The payment model needs to define the conditions under which affordability and access
increases under these sophisticated pricing rules. The payment model should mimic
demand price elasticity with price – volume contracts. That is, obtain lower price if more
patients are treated. In case of price differentiation, set an (average) price cap over the
different markets such that all parties benefit. A simple example is that allowing price
differentials across groups of users of the same pharmaceutical product should lead to a
decrease in the average price relative to the single-price situation.
5.10. Create dialogue platforms
Different platforms for information and dialogue can be set to discuss and prepare future
payment models. One platform involves only countries. Another platform involves
countries and high-level representatives of pharmaceutical companies. These platforms
will share information and knowledge. Horizon scanning and guidance on priorities for
research should be in the agenda of these platforms.
New payment models should be accompanied by mechanisms that take pharmaceutical
companies as a partner of health systems in promoting innovation and financial
sustainability, although recognizing that companies also have shareholders to whom
management is accountable.
Decisions taken by public authorities need to be part of a broader policy making process.
Such policy would help on the convergence and reconciliation of various policy objectives
(safety, innovation, access, affordability etc.).
Moving forward in the development of new payment models will require multilateral
country cooperation in most of its avenues of evolution.
6. Final remarks
The discussion of innovative payment models for high-cost innovative medicines results
from the concern about financial sustainability of health systems under the pressure of
very high prices asked by companies to introduce newly developed products into the
health insurance coverage provided by health systems.
Innovative payment models for high-cost innovative medicines
65
A variety of different pricing models have been proposed, and some introduced in several
health systems.
A first point is the existence of several issues that new pricing models intend to address:
uncertainty about the true benefits of the new product, the desire to promote quick
access of beneficial products to patients, reward innovation, promote innovation in
neglected therapeutic areas and maintain sustainability of health systems, are among the
highest-ranking ones.
A second point is that only one type of payment model will not be able to address all
these objectives at the same time. Aiming at several objectives at the same is likely to
require several instruments, including payment models but not restricting to a single one.
Different payment models imply distinct trade-offs across objectives. In particular,
managed entry agreements are often designed to deal with uncertainty about true
benefits of the new product at the cost of high prices, which may configure situations of
abuse of market power. It is important to note that abuse of market power results from
the institutional framework defined by countries, and as such requires use of instruments
directly aimed at curbing it, as the role of price-sensitive demand is mitigated, or even
eliminated, by the existence of insurance protection, public or private, against the
financial consequences of health care needs. Removing such protection entails social
costs, and different institutional frameworks have to be defined to address the issue of
market power. The intuitively attractive idea of pricing according to costs has the
drawback of undermining the incentives to obtain innovations with high value in an
efficient way to instead promote high-cost incremental innovations to justify prices.
Thus, the policy toolbox has to make use of several payment models, according to the
most relevant problem in each case. More than defining a single payment model, it is
important to define a set of principles that payment models should follow, and allow
flexibility in the design in each case. For example, for neglected therapeutic areas,
payment models based on new ways of procuring innovation can be used. Under
asymmetric information between companies and health care payers about the true value
of new products, the use of health technology assessment provides a way to health
systems learn about such value. When uncertainty exists about effectiveness of new
products in the overall population, managed entry agreements with a performance
component embedded in the payment model and use of real world evidence may be a
useful instrument. Whenever high margins over costs are likely to be present,
strengthening the bargaining power of health systems and using payment models that
reduce exercise of market power is desirable.
Innovative payment models for high-cost innovative medicines
66
Thus, the definition of a single payment model for new pharmaceutical products should
give way to definition of a set of principles to be followed, and let payment models adjust
to the particular conditions of each therapeutic area. These principles were described in
detail above.
The fact that no single payment model emerges as dominant, at the moment, from the
principles described above does not preclude that clusters of models according to basic
features will develop over time, with countries learning from each other’s experience. The
use of payment models that hold the principles described above provides an opportunity
to set a European learning community in this area. In a sense, one can already observe
such clusters of models being created under the general heading of Managed Entry
Agreements, as described in the several taxonomies available. One clear distinction is
between payment models based on health outcomes and those not based on health
outcomes. The first cluster, health-outcomes based payment models, address mainly the
concern of uncertainty about product value and how contingent payments may be useful.
The second cluster allows the ability of companies to have “commercial confidential price
discounts” off list prices, as a way to avoid international price referencing by (some)
health authorities and adjust pricing to the context of each country.
International (external) reference pricing rules give the power to set prices to
Governments/health care payers through the definition of a basket of countries of
reference. International companies can indirectly influence it through their cross-country
pricing strategies (including MEAs that keep effective prices secret). Future payment
models will also imply a balance of power in price definition.
The discussion of the principles adopted in this Opinion to help frame the development of
new payment models for innovative pharmaceuticals apply equally well to products that
provide treatment for chronic or continued conditions (as it is the case of new products in
oncology, for example) and to new products that are curative (say, a product that stops
epidemics of infection). As described, intergenerational effects can be included in
payment models, reflecting the time profile of benefits. Whatever the type of innovation,
the concerns of uncertainty about the true value of the product and of market power
exercise on prices are present and both concerns should be explicitly be addressed in the
payment model.
Pricing of new, innovative, medicines is best seen as a dynamic process starting from
early phases of development (R&D costs) and adjusted where relevant and towards the
Innovative payment models for high-cost innovative medicines
67
end-life of the product (but such approach needs clear criteria), good use of different
tools and continuous cooperation of relevant economic agents.
The principles outlined in previous sections focus on the medium and long run. Concrete
actions resulting from these principles can be taken in the short, medium and long-run.
From the principles outlined, several concrete actions can be defined, including, inter alia,
(i) relevant authorities within health systems (say, health technology assessment bodies,
regulatory agencies deciding on reimbursement, etc.) asking for R&D costs, marketing
costs and production costs, even if these are not disclosed to the general public or to
other companies; (ii) select one neglected area and launch international prize initiative
with patent being retained by the set of countries participating; (iii) check existing
payment models used in each country against the principles defined above; (iv) introduce
a competition policy review of high prices asked by companies, with cooperation of
competition authorities; (v) assess value of new products of uncertain benefit using
sound and transparent health technology evaluation methods; and, (vi) strengthen
bargaining power of health systems as buyers by using joint negotiation procedures and
consider the use of mandatory licensing in extreme cases of public health risks.
The proposed actions are already in practice in some cases. We provide here an
integrated view of these several actions, highlighting their advantages and
disadvantages.
Companies that produce truly innovative medicines (of high value and benefit to
patients) and are rewarded in a way compatible with financial sustainability of health
systems will thrive and grow on the basis of the merits of their innovation.
Four activities have dominated the management of healthcare in the last twenty years –
prevention, evidence based decision making, quality improvement and cost reduction.
All of these are important in value improvement but it is important to remember that
although low quality care is of low value, high quality care is not necessarily high value.
For example, imaging may be delivered at high quality but be of little or no value to the
patients who have had the investigations. In particular, if the higher resolution image
does not produce different decisions than previous images, it brings no value.
Interventions of unnecessarily high cost are of lower value but even when cost is reduced
value is not necessarily increased unless that intervention produces outcomes of
relevance to the people treated.
Innovative payment models for high-cost innovative medicines
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There is now a new management agenda developing, which includes several key points:
ensuring that every individual achieves high personal value by providing people with full
information about the risks and benefits of the intervention being offered and relating
that to the problem that bothers them most and to their values and preferences; shifting
resource from budgets where there is evidence from unwarranted variation of overuse of
lower value interventions to budgets for populations in which there is evidence of
underuse and inequity; creating population-based systems that ensure that those people
in the population who will derive most value from a service reach that service, that the
service is of high quality with no waste, that there is faster implementation of high value
innovation to improve outcome, funded by reduced spending on lower value interventions
for that population and that increased rates of higher value intervention within each
system are achieved .
Innovative payment models for high-cost innovative medicines
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MINORITY OPINION
None expressed.
Innovative payment models for high-cost innovative medicines
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LIST OF ABBREVIATIONS
HTA Health Technology Assessment
EU European Union
HIV human immunodeficiency virus
HIP Highly innovative product
HRQL Health-related quality of life
MEA Managed Entry Agreement
PRO Patient-reported outcomes
RWD Real World Data
TRIPS Trade-Related Aspects of Intellectual Property Rights
NHI National Institutes of Health
Innovative payment models for high-cost innovative medicines
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APPENDIX Alternative taxonomies for MEAs
Figure A1: Taxonomy of Risk Sharing Agreements
Source: Carlson, Sullivan et al. 2010; Espín, Rovira et al. 2011
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Figure A2: Taxonomy of managed-entry agreements
Source: KCE (2017, p. 9)